© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen. Welcome to the Grenke AG Conference Call regarding Q1 results 2020. [Operator Instructions] Let me now turn the floor over to your host, Antje Leminsky.
Good morning, ladies and gentlemen. Welcome to our earnings call for the first quarter 2020. With me today are Antje Leminsky, our CEO; and Sebastian Hirsch, our CFO. For the first time, we are presenting a set of slides to accompany our remarks on this call. The presentation, the press release and the quarterly report are to be found on our website under grenke.com/investorrelations. For those of you who don't know me yet, my name is Anke Linnartz and I'm Grenke's Head of Investor Relations. I'm the successor of Renate Hauss, who retired after 29 years working for Grenke. I'm looking forward to working together with you. Before we start, I would like to remind you that the presentations and discussions are conducted subject to the disclaimer. We will not read the disclaimer, but propose [ disclaimer's ] read into the record to the purpose of the conference call. Please note that this call is being webcast live, and will be archived on our website. Our agenda for today starts with a presentation by Antje Leminsky. She will then hand over the call to Sebastian Hirsch. After this, we will have time for Q&A session. With that, I'll pass the call to Antje Leminsky.
Thank you very much. Dear ladies and gentlemen, thanks for joining and a warm virtual welcome to all of you. While corona has shifted priorities for all of us, but we are confident that Grenke has been very robust so far because we immediately adjusted our focus. So let's look at our business operations first. To protect -- the protection of our employees, partners and customers became a clear priority for us in quarter 1. More than 90% of them shifted to home office within days with no substantial effect on our business continuity, and at the same time, our focus is on the balance of liquidity and risk, of course, resulting in a revised view on the qualities of our new business. We deliberately accept lower growth, we aim at higher contribution margins, and thereby, we think we can [ custom ] any possible increase in risk. Looking at our markets. Despite the emerging prices, our operations remain largely unaffected in the first quarter of 2020. We are present in 32 countries with about 150 branches. And in Q1, we even opened 4 new locations in Canada, Spain, Belgium and 1 in the United Arab Emirates. And we also finished our prep to open the U.S. franchise right after the end of Q1 on April 1. And all this, we believe, contributed to the regional diversification of risk. Looking at our customers, we are taking the chances given by a high number of customers and the independence of selected industries. We extend our [ IR SME ] customers who need to continue their investments despite of this crisis. And we are confident that especially to enable many of them by financing digital equipment, for instance, for their home office or medical technology. And all these contracts have already been processed entirely digitally for years, which helps us more than ever right now. And in addition, we were able to even increase our customer satisfaction in this very special situation. We received very positive feedback on our comp answer on forbearance requests that came in mostly before governmental program were deployed in many countries. And in fact, within days we were able to set it up digitally, fairly standardized and to be processed highly automated for more than [ 2020 ] countries. An instant relief for many that we believe will pay back in our customer relationship in the long run. Regarding our shareholders, we decided on a new date for our AGM on August 6, 2020. And we will conduct the meeting as a virtual AGM. In light of the prices, but also to keep our investors participating in the success of Grenke AG, we proposed a dividend on last year's level of EUR 0.80, coming down from EUR 0.88 that we originally planned in February. Our shareholder can choose to receive the dividend in cash or in a combination of cash and shares. And that we support our equity position, and we offer our solution to further participate in our success. Last not least, looking at our strengths, our business model is based on processing and analyzing data very fast. Our profitability is based on a highly efficient digital organization and infrastructure. And our response times are short. And that's why despite the crisis that this is very important to us, we continue our investment into strengthening those competitive trends with new products, services, scalability, better process management just to give examples. And of course, also regional expansion, as mentioned before. And that's what allows us to take even more use of the chances right after the prices when demand picks up again, and it will for sure. So now I would like to start reviewing our Q1 results. Please move on to our new business development for the group on Slide 5. On the left-hand side, you can see that in the first quarter, despite COVID, we managed to increase our new business for the whole group by 5.7% to EUR 871 million compared to EUR 824.4 million last year. And on the right-hand side, with regards to the split by segment, not surprisingly, you can see that still with the share of 78.2%, leasing is still our core business. So let's look into the divisional split more deeply on Slide #6. First of all, despite COVID, we see growth in all segments. In Q1, leasing new business increased by 1.6% to EUR 681.3 million. New business performance was within the forecast, and we mentioned that with our new business results already in -- within the forecast cost range in the first 10 weeks of the current fiscal year but the global constraints on macroeconomic activities as a result of COVID-19 significantly impacted new business growth, particularly in the final days of the first quarter. So growth rates by region, of course, had a much higher variance than before COVID due to the fact that the pandemic hit the countries in Q1 at very different points in time and with different consequences in terms of the business continuity. Further to this, in the first quarter of 2020, Grenke Bank expanded its new business in the area of lending to smaller and medium-sized enterprises by 53% to EUR 18 million compared to EUR 11.8 million the year before. And in the factoring business, new business volume increased by 21% to EUR 171.7 million. New business in Germany as well as in the international markets recorded high-growth this time. With the debt collection business, representing a share of 22%, previous year 20% and new business in Germany increased by 20% to EUR 49.2 million. So if we now have a look at on Slide 7. Here we provide rate term by region for our leasing new business. And by region, you can see Q1 2019 and Q1 2020 and compare them. Key message here, we saw areas with strong growth and areas with sharp decline. On the positive side, where the DACH region, North/Eastern and Europe and the others region and on the negative side, Western and Southern Europe. To be more precise, the strongest growth was recorded in DACH, comprising Germany and Austria and Switzerland, where new business was up 16% to EUR 158.2 million. Clearly, Germany with numerous long-standing relationships that were share with customers and dealers in our home market have been particularly positive and mostly contributed to the growth in DACH region. In contrast, new business declined, particularly in Southern Europe by 7% to EUR 196.9 million. Italy was down 16.4% driven by the fact that COVID pandemic hit Italy sooner and to a greater extent than any other European countries. The Northern/Eastern Europe region in the reporting quarter recorded growth of 11% to EUR 120.5 million. And other regions recorded an increase in the volume of new business of 6% to EUR 28.3 million. And however, this growth, of course, was recorded on a low base. So now let's have look -- a closer look at the type of products our customer decided to lease in the first quarter which is shown on Slide #8. You know that we are a leasing company. And when Wolfgang Grenke founded this company back in 1978, it all started with small-ticket leasing of IT equipment. And thus IT equipment, such as notebooks is still our biggest object category even in Q1. The share of IT is quite stable and directly represents 1/3 of our leasing portfolio. In Q1, IT leasing objects were slightly -- were slightly softer with a share of 34.6% compared to 35.2% in the respective quarter last year. And as we've already indicated around our communication for the leasing new business on April 2, medical equipment has increased, not strongly but slightly from 8.2% in the previous year to 1% -- to 9.1% right now. Again the last variety of objects prove that we continue to be highly diversified and largely independent of individual sectors. And this, we all know is more important than ever given the current circumstances. This leads me to the key figures for the first quarter on Slide #9. And here, we can see that despite COVID-19, we are presenting a solid type of results, we believe. Net interest income and similar income from financing business improved by 15.9% in the first quarter of 2020 to EUR 101.1 million. The operating result is down by 24.9%. Main reason here are increased expenses for the settlement of claims and risk provisions, which is up at EUR 15.8 million. As a result, our loss rate increased to 2.3%, and Sebastian will give you all the details on that later on. Net profit came in at EUR 23.7 million, decrease of 29.8%. But also a function of the tax rate, which stood at 18.5% compared to 16.8% in Q1 last year. The increase in tax rate, you'll remember, had already been communicated by us. Just as a reminder, it results from the expired [indiscernible] program in Italy. All this finally translates to an EPS for the equity holders of Grenke AG on EUR 0.35. So now please move on with me to Slide 10 with regards to our guidance. As we have already communicated on April 2 on the occasion of the publication of leasing new business figures. Our previous guidance does not reflect the impact of COVID-19. We will update our guidance for the 2020 fiscal year as soon as we have gained sufficient clarity. And as soon as we can fully assess the effect of COVID. And of course, we will keep you posted on that. What we can share with you as of today are, however, a few assumptions that we have made. New business growth for the current fiscal year as a whole will clearly depend on the further course of the pandemic. What we saw in Q1 was that the level of new business in the last 2 weeks of Q1 came in at around 50% of the new business that we've originally planned. And what you can see from the last week and what we assume going on, that this will be true also for Q2 and for Q3 in 2020. This is why, given the fact that we cannot assume the virus to get under control before the last quarter of this year with either a respective drug or to be -- to suppress the effects of an infection or a vaccine to even prevent an infection. And until this point, business activity, we believe, and therefore, new business growth cannot be expected to get on higher than this level. But our business is scalable, as you know, we can operate profitably with a low volume of new business and appropriate cost savings on the other side. And this will keep our cost income new ratio under control, loss rate at a slightly higher range and equity ratio is strict on target. So to sum it up, given the circumstances we recorded, a solid set of results in quarter 1 of this year. However, as of today, we can't reliably forecast how our business will develop during the course of the year. We have to expect changes in many ways while customer behavior, payment behavior certainly will be the most sensible one. However, what we know is that we have knowledge people, that our business is based on excellent technology, we have long-standing relationships with our dealers, and above all, we have experienced in dealing with difficult economic environments, such as the crisis in '08, '01, '09. So thus I'm strongly convinced that together, we will manage the prices successfully. And now I would like to hand over to Sebastian Hirsch, who will lead you through our financials. Sebastian?
Thank you, Antje, and good morning to all of you also from my side, and I would like to walk through some financial aspects for the first quarter 2020. On the slide, you see the view to our equity, and as Antje mentioned, in Q1, we recorded new business growth in [ recent ] of 1.6% and the softer growth in new business and the decline in net profit led to an equity ratio of now 17.2%. Also, there is a slight decrease compared to Q1 2019 and also compared to the end of the last year, but it is still well above our target of having an equity ratio of at least 16%. From the regulatory point of view, our total capital ratio according to CRR, the capital requirement there is stable and was stable at 16.3% after the 16.5% last year. And due to the several reasons mentioned before, decline in net profit, lower new business growth and leasing, also our return on equity dropped to 7.5%. And the decline in net profit was mainly due to the rise in settlement of claims and risk [ aversions ] in accordance to IFRS 9 and COVID-19 pandemic and I will come to this in more detail in some minutes. The next slide shows you our funding mix per end of March. And as you can see, a little bit change towards the funding through the deposit business with our Grenke Bank, and a very important part especially at that time and in Q1 2019, we increased funding via Grenke Bank to a level of 22% for the group. And this development might continue further with a higher tendency towards the financing through our deposit business with Grenke Bank. And this is due to 2 factors. The deposit business is more preferable in prices, means and interest rates today, And at the moment, also with a quite easy access in comparison to capital market partners. Nevertheless, we will stick in each box, as always, to fund our business, but a wider deposit business gives us more flexibility and space but also we can't cover the whole funding, the whole portfolio with deposits. And that's also the reason why we took the term and our ability to successfully place the EUR 200 million bond in -- with the beginning of April. And the proposal of this bond was to secure liquidity at that time, certainly in a very difficulty time at the capital markets as you still see demand for our financing solutions in the market. So we are sure in our liquidity position to go forward with our new business. And this bond take up rather more portion of senior unsecured share, amount in total to EUR 2.3 billion of the funding mix. And to add some information of standard improvements in our rating. On April 23, Standard & Poor's affirmed our BBB+ rating from a long and short-term perspective as the issuer rating of us as well as issuer rating of the bank debt. At same time, S&P revised its outlook on Grenke AG due to expected impact of the COVID-19 pandemic to negative from stable. And in its statement, the rating agency, and you can read this -- to top our economic conditions in Grenke's main European markets over the next 18 to 24 months. And we are well on-track with Standard & Poor's as always. And it was more or less in the line with the global action from Standard & Poor's, as you can follow-on the S&P's website and publishing. On the next slide, we show you our development of profitability, especially with the [ few ] to our contribution margin 1 and contribution margin 2. And with our focus on contributing a profitable contract, the contribution margins developed favorably in the first quarter of 2019 [indiscernible]. This is a trend we saw in all regions and so CM2 of the leading segment overall amounted to 100 -- roughly EUR 124 million at the end of the first quarter. And this compounds to CM2 margin of 18.2% compared to 17% contribution margin 2 margin for the whole fiscal year 2019. And contribution margin 1 increased also with a margin of roughly 13% per the end of the first quarter. And the increase of CM2 margin was and is a result of the [indiscernible] and implemented also in the last year, where we already saw an increase quarter-to-quarter. We steered our sales force more on concluding contracts with higher margins, as mentioned before, with a focus on small tickets, and this is very important also in the current situation to tighten the risk and to focus on our main and core business, small medium enterprises and small tickets and to take care for a high diversification in our portfolio. And we are always focused on achieving profitable growth. This means that the contribution margin should grow in minimum proportionally to our new business growth. The next slide, you are aware of that -- are showing the method of contribution margin calculation on the one hand, and the other part our P&L. So operating income, like revenues under the IFRS regime for our business is in line with the contribution margin 2, as you know. The P&L for the first quarter, I would like to point out 2 positions. On the one hand, settlement of claims and on the other hand, settlement of claims probably and risk provisioning, on the other hand, the profit from service business. As for the settlement of claims and risk provisions, we saw a significant increase of expected losses as a result of COVID-19 pandemic. This was visible as the further reporting date and risk provisions under IFRS 9, especially. This has increased by 15% compared to December -- per end of December 2019. And a large part of this risk provision was attributable to the legal business in Italy, but also to the other countries where we are taking care for a higher expected loss under the IFRS 9 region. Nevertheless, at the end of the day, roughly EUR 60 million or more expected losses today in the P&L of the first quarter under the IFRS 9 regime, and that's what we are taking in account, the higher expected losses because of COVID-19 pandemic. The group's loss rate increased to 2.3% and within that 2.3%, we are more or less in the area of 2009 during the financial crisis. And from our to date perspective, we assume a loss rate between 2% and 2.3% for 2020. But at the end of the day, it depends on many parameters and instruments. Net interest income after settlement of claims and risk provisions in the reporting quarter sold accordingly by 15% to EUR 50.3 million. The second thing I would like to point out is profit from service business because it improved by 32%. And that's mainly the result of the strong growth generated in the previous period and all the other persistence in our P&L, leading to the operating income, we're quite stable. Our cost structure, and Antje mentioned it because of our income ratio and [indiscernible] is quite stable. There are no abnormalities. And the number of new employees as well as the staff cost with a growth less than a 10%, newly leading to a decline of the cost income ratio, which we will see on the next slide. As communicated on February at our analyst conference, we will show our cost income ratio a bit different than in the previous year. And we will show that without the provisions -- settlement of claims and risk provisions, which is quite common in the market and in many reports of you. And you can see here that we were able to manage our cost side efficiently so that we were able to reduce the cost income rate by 65 basis points to a cost income ratio of 43.5%. This is a ratio that is very important for us also during the crisis, and that's why we stick to our goals, we're having a cost income ratio below at 46% as Antje already mentioned. The next slide gives us the flavor to the loss risk provisions and so on. And both are, you are aware of, and we wided out the time line and started in 2007 to 2019 and that's for giving you flavor and to remember us, what has happened during the financial crisis and what happened to the portfolio during the financial crisis. Of course, we are aware of the fact that the financial crisis in 2009 was not the same or is not the same like the corona pandemic but that can help a bit to find the right direction in measuring things and that's why we decided to show you also this chart [indiscernible]. On the right chart, you see the expected losses versus the incurred losses, which were realized. And what you can see here is that we are able to approach those 2 figures closer to one another, means, we would like to have a low deviation between expected losses and real losses at [indiscernible] operators, one of the key to our risk. And -- but you also see with experiences of the crisis in 2009 that the portfolio which went through that crisis, meaning 2007, 2008, the new business of that period that are very important for that. And what we can see here is and deviation between expected losses and real losses between 1.5% and 2.5% over the whole term of the leasing portfolio and always in comparison to the net acquisition cost. And when we take in account our current CM2 level in the last year of 17%, in the first quarter this year of 18%, then we see enough space to absorb that risk, that unexpected loss because the expected loss is always part of our contribution margins 2 level, meaning the 1.5% to 2.5%, and we are absolutely able to absorb that -- this kind of unexpected lot with our high contribution margin 2 level today. And on the left-hand side, you're seeing the periodical view from our P&L structure there. We had to take in account the regime under IFRS and the IFRS 9 regime, especially since 2017. And there, we have to calculate higher risk provisions for the existing portfolio, not only for new set of contracts. Because of the pandemic, we expect and because of the change in the macroeconomic environment, we have to expect higher losses for the future. And that's why the losses there increased by EUR 60 million -- EUR 50 million, only EUR 50 million because of the higher expectations of corona pandemic. Also here, it's [indiscernible] to look to the part in 2009 and 2009. There, you see also the increase on the loss rate, and there the loss rate was roughly in the area of 2%. And as we always mentioned, in the last quarters for a scenario in crisis, you have to add roughly 25 basis points for the IFRS 9 regime, and now we are in the area with a 3 point -- 2.3%, sorry, in the area of that 2% in the same area like 2009. And the last slide. So also a view to the last crisis and a bit more in detail how our figures developed during and after the financial crisis. And again, we are knowing that the prices is not the same but this kind of comparison can help us and maybe also you. In 2009, we saw a drop in leasing new business -- new business less than 16.5% because we steered our new business growth very carefully with a clear focus on small ticket with the business paying light. Today, we try to be careful. We are focusing on small [indiscernible] business. And so the experience of 2009 are very hurtful [indiscernible] for today's business. And the advances -- advantage today on all of our markets was quite clear because after the crisis in 2010 and 2011, we were able to going forward with our partners and customers they were very happy that we supported them in several times, and that was the main reason to stay, to stick in all the markets that new business was -- grew significantly by 43% in 2010. Also for the development in net profit, during the financial crisis, you see on the right-hand chart, it's a similar picture. You see, we've realized a decline of minus roughly 26% from 2008 to 2009. The main driver also risk provisions, settlement of claims and also the lower new business growth and the recovering was latest in 2011, 2 years later. And the loss rate, I mentioned the loss rate before was 1.2% in the price of 1.9%, roughly 2% quarter wise. And we saw a loss rate later than also we noted in the area of 1.4% and 1.2% after the financial crisis. We do see some similar risky in the current crisis. Of course, it's the same. It's different but some things are similar, the development of new business today, the steering of new business, focusing on our clients, on our sustainable partnership on the small tickets, of course. But there are also some differences that -- and from several points, we are better prepared for a crisis than in 2008, 2009. Of course, we have a high diversification in our portfolio. We are present in 32 countries worldwide, we have a high diversification in industries and also in several optic types, for example, medical equipment today is a higher portion of our portfolio than it was in 2008, 2009. We also diversified our funding mix. That's very important and the main difference to 2008, 2009. With Grenke Bank, the deposit business is a very important box of our funding as we saw some slides before. And also, we have today a wider investor base for the debt price also for our senior unsecured funding. We are able to work completely digital and stay in market with our digital offerings. We are able to work in home office. That's also because of the whole environment, but also our digital development distance to 2008 and 2009, which makes it a bit easier to work through and to work in debt crises. And last but not least, we are able to manage our equity with different instruments and very flexible. We did that in the course of the last years with hybrids, with scrip dividends and also with a capital increase. And that's also why we are able to offer a scrip dividend as a solution for our annual meeting. And that's also very important to be able to be flexible in steering capital ratio. Thank you for your time. And I will now hand over to Antje Leminsky.
Thank you very much [ for your participation .] We would now like to enter into our Q&A session. Just now I would like to turn the call back to the operator.
[Operator Instructions] The first question is from Johannes Thormann with HSBC.
Three questions, if I may. First of all, could you elaborate a bit more on your current risk costs in the first quarter? How much of this has been stage 1, stage 2 and stage 3 provisioning? And secondly, in terms of your guidance, do you think for the 200 to 230 bps risk cost, that this is rather an effect only in 2020? Or should we also expect for 2021 an elevated level of risk cost? Secondly, could you give us -- you said this is -- you said that the project, you plan with 50% of volume. Could you update us on April volumes because we have now the second business day in May, and we could probably see how April has gone. If this is in line with the 50% or better or worse? And last but not least, on your costs, give us a better feeling how you want to-- what we should expect. Do we expect operating cost to decline in the second quarter with lower new business or do we still continue to invest and we should see still a gross run rate in cost?
Yes, I would start at the first question of risk provisioning. The first one, we'd like to point out what in the stage 1, 2 and 3, I can give you a bit flavor. We have roughly 30% in stage 3 and roughly 25% in stage 2 of the IFRS 9 risk provisioning. The rest, the rest would be in stage 1, and the overall IFRS 9 risk provisioning in the full quarter from the balance sheet perspective, means that the whole expected loss under IFRS 9 is roughly EUR 130 million. And to give you flavor for the loss rate, it's not that easy, as we mentioned. It that easy for 2020 and also not for 2021 because it depends on 2 things. On the one hand, the development of risk provisions, settlement of claims, that's very important, and there -- for that year, we assume more or less the same level we saw in the first quarter. And the second very important thing is what will happen with the new business volume. And at the end of the day, that our volume under management means that the second important figure for our loss rate. Means on one hand, the risk provisioning is important. And on the other hand, the volume, the balance sheet growth, the new business growth is important. So important to forward that figure more than some quarters -- [indiscernible] today, sorry.
Okay. Regarding the new business, in fact, what we can say is that already start before. That beginning in March, we were having a much closer look at the development of new business, being selective on business in terms of the volume, at the production side, in terms of the ticket size, in terms of the industries we're going for, of course. We were taking up the conditions and really looking closer at the retracks and as that and it develops from week to week, we are right now and we can confirm that was the look at the last month, at this level of 50%. We can slightly see, again depending on the country's increase in requests here and there, but we all know this is very sensitive -- sensible and very much depending on the further course of this pandemic. On the other side, when we look at the cost, and this was your third question, we are well prepared. We were going through the planning of our costs again, looking at the variable parts, and we are confident that we can see a decline of roughly 10% with major effects in the cost of personnel, considered because of variable parts because of less recruiting and things like that, but also about 25% on the sales cost side as we look at marketing, travel or information costs for example. So that's why we are very confident in terms of our cost-to-income ratio overall.
I would like add -- maybe to add one point to the new business development, as Antje mentioned, the 50% of our former plan looks like a quite stable level in the crisis there. And as Antje mentioned, it was also stable in April like within the last day of March, the roughly 50% of new business, and it is quite stable today. And now it depends on how long the reflections of the government and so on will go forward and that's very important for the -- looking forward in our new business, but the 50% level, as you ask, is quite stable also for April.
Thank the next question is from Gerhard Orgonas with Berenberg.
I have 3 questions, please. First question is on the bond market. Can you tell us a little bit about what's going on in terms of refinancing rates compared to last year? How many basis points were higher on average and how much that you can pass on to your customers? The second question is the profit from the service business, which is very high in Q1 is that sustainable on a quarterly basis this year?And maybe a third question, on the ground in Italy, I think you were trying to recover the efforts after two missed monthly payments. Did you experience the number of [indiscernible] in Italy? And then how does the actual recovery look like at the moment?
Okay. First, bond market. The bond market, as all the markets, are very volatile over the last weeks. But very important is that the bond markets are working, there's liquidity in the market. But of course, we have to pay in higher credit spread today. So the input in environment, when we talk about interest in terms of exchange there, and our bonds in the 5 years bond -- our long 5 years bond was on a coupon of 3.95% in comparison to our last transactions in the last year. It's much more expensive. How sustainable that level is, we can't say. What we see is higher funding costs overall in area of, I think, 50 to 100 basis points in minimum, and then it will go forward. I think we can assume 150 to 200 basis points for new issues. For our funding cost, the impact is not that hard because we are well-funded for our existing business. We have also the access via Grenke Bank and interest rate of -- deposit business are not in the area of 2% or more, it's less. And so in the mix of our funding cost, we are talking today about 1.5% to let's say 2% in over this year and the last year, the funding costs are more or less in the area of 2% -- 1.5% -- it was less than 1.5%.And service business. The service business should be sustainable. It's a very sustainable and -- business where you can calculate this because of the stack of the business. And there we have also a lot of experience then. And so the level of that business sustainable for this year. Depends more or less from the existing business and not that much from the new business, of course, level of new business is also important but for the existing business, that should be sustainable for the fiscal year. And in the last question was in the process, the recovery process in Italy, but quite different, not only in Italy, it's more or less in all the countries, not that easy today to go after 2 installments and take objects. We are talking in many countries about payment deferrals, means there's something like a grade in payments for 3 months or 6 months, and to cover the bridge for the small, medium enterprises and for our clients. We are talking there of a loss -- less portion of our portfolio and it's roughly 10% with something like a deferral agreement. And how the process will work if that prices to go and terminate the contract, take care and taking the object that we will see in the future and we have to prepare for that. That's for sure and that's too easy to say because we are running now in the first lump payment. And first, remind, of course, that the termination process at the termination process will come after the second lump payment, and then we have to take care for that tech. And hopefully, at that time, in the time to develop to take care for the whole of the [indiscernible].
The next question is from Mengxian Sun of Deutsche Bank.
You mentioned that there is a 15% increase in risk provision compared this year-end figure which is related to the model assumption regarding to COVID-19 and the question is does the 15% increase compared to the full year result or the last quarter in 2019? And can you also give us a little bit color on what's your macro assumption behind that? Of your loss rate between 2% to 2.3%. And then we expect a general economic recovery in our model assumption, much appreciate if you can give us some information on that.
Yes. And the 15% is compared to the last year and looking to the balance sheet, and as I mentioned before, at roughly in the IFRS 9 and expected loss per end of the last year compared to the IFRS 9 expected loss per end of the first quarter because it's much more sensible to compare -- that those figures than compare an expected loss level of the end of March last year with the end of March that year because much more stable. It's much more comfortable to take. [indiscernible] measurable figure and that was for end of the year, and the increase of 15% of that. The adjustment in the model and what kind of adjustment, it's not that easy because from a statistics point of view, you can't measure many things today. You can have a bit of feeling, you take in account our experiences of the former crisis. And we had also to take in account the diversification of portfolio, we have to take in account the several things which were announced and that are in place from the state, from the government in terms of liquidity and currencies, that's not that easy to build that in the model because from a statistic point of view, the COVID-19 pandemic is very young. And that's why we adjusted because of all the experiences we have and the experts we have, and come down to the increase of that 15% and feel very comfortable with that level of the 2.3% loss rate. And the model will become more and more detailed and let's say, better and better and over the year because then you can measure in the portfolio, there are missed payments. There are late payments and there is maybe an intervenor or something like that, bankruptcy, you will see that over the next month and over the next quarter, today, we have a very, let's say, healthy portfolio and you only know that you have to expect more losses for the future for that healthy portfolio. And that's quite difficult to deal there with parameters and hard numbers.
The next question come from Andreas Schafer of Bankhaus Lampe.
So there are 2 questions left from my side. First of all, I saw that your embedded value dropped in Q1 slightly despite the fact that the business was still positive and you still earned a net profit in Q1. So is the higher expected losses are already included in the new embedded? And the second question is looking at the expectation for strong decline in new business growth in the next 2 quarters, do you expect then the balance sheet to shrink this year going forward? And what is your assumption for your equity ratio at the end of the year? We have also some sort of feeling where you could end there.
Yes. Okay. Thank you. The first question, embedded value and also at the time is to calculate the embedded value there are many assumptions included, and of course, also the higher expected loss and expect -- the higher expected provisions are part of the embedded value calculation. And that's why the embedded value dropped a bit. And also the new business growth was not that far back in the previous quarter and that's why the embedded value and overall, including equity and tax is quite stable. You got that right. The expected [indiscernible] especially the risk provisions are included there as part of the expected -- of the embedded value. And thanks to that, balance sheet and volume is not that easy because it depends on many parameters, as mentioned and depends on the development in new business. I think it's from the today's perspective, it's a fair assumption to take a balance sheet figure on the same level like it is. Means, without growth, so that should be a balance of being -- and portfolios and the new business. So I think that is a fair assumption from the today's perspective, but it can change depending on new business development over the next month and also, when we're talking about the whole fiscal year, what can happen and will happen in the last quarter, it was a new business development. And the same is for equity from the today's perspective, it's also a fair assumption to take in account that the equity rate will be stable. Of course, you have to take in account the dividend in August now. That's important when you're talking about equity and equity ratio. So there you will see a chain, but it's always the same after the annual meeting. And from all the other assumptions there, it should also be more or less stable because when that's not reduced growth, we will not have a dilution on the equity ratio on the one hand. On the other hand, the profit is less than expected, and we so we have to inspect it in different directions and so, again, it's fair to assume there a stable equity ratio.
Next question is from Tobias Lukesch of Kepler Cheuvreux.
First one, again, touching on the new business planning and also the kind of declining. Could you maybe give us a bit more flavor on the final considerations you just mentioned, okay, there is the 50% probably lower growth in Q2, Q3. Is it fair to assume then to go for kind of midpoint growth in Q4, Q1 next year? You're probably not making a forecast, but what does it mean actually then for your capital trading? And you talked about the scrip dividend that we use planning maybe also here, what kind of share of scrip dividend would you expect from your shareholder base? And yes, what is then finally the action on the hybrid capital side on potential equity raising either to cope with potential expected losses, which might increase, if I understand you correctly, over the next quarters and secondly, the new business growth, as you mentioned, the balance sheet might stay stable with higher NPLs, we have still an increase in volumes in the lower single-digit area so a bit more flavor around that consideration would be very helpful. Secondly, on the payment behavior of your customers, there was a big payment there during the first of April. Could you please remind us how big the share of this quarterly payment customers is compared to monthly payment and what you experienced here. So have there been deferrals up to today where you have now the further increase in number of 30 days past due? How is the development on that side? And finally, you mentioned at the end of the day, the channel values, the leader values of the assets, the potential collection of assets, of deferred assets in certain countries. What exactly is then the gains and loss development expectations that you have in your model, as this is not part of the risk provisioning that you were kind of guiding for with the loss ratio?
Yes. So let me start with a closer look at the payment behavior, that was the second question that we have looked at in quarter 1 or the week after. Indeed, we do have our quarterly runs usually around the end of the quarter. So we can see the results of that in the weeks after that. What we could see this time is that the number of new payments or, yes, new payments in this one, was, of course, a little bit higher than, for instance, in compared to January, we're talking roughly about 10% compared to usually around 4% to 5% that we look at. But again, this number becomes a little, yes, of course, down on the course of the weeks after because we talk with the customer, we talk with the different partners and try to point solutions for the payments so usually this number goes down. After a while, what you also have to take into account that given this 10%, roughly 1/3 of it already asked for deferral or forbearance so weeks or dates before so there we are talking right now. Sebastian has already talked about it, roughly about a 30,000, 33,000 that we have processed, meanwhile, automatically and therefore, deferred their payments for normally 2 quarters, so roughly about 6,000 open to process. That was at least the level end of last week. So you also have to take that into account when we're talking about the 10% payments at the end of April. And your question regarding quarterly payers, we're talking roughly about 60% of quarterly payers. So again, that helps us on the course of the next weeks with the monthly payers to see whether there are any substantial changes in payment behavior with our customers on the quarter, corona.
Yes. I will come back to the question of new business development, capital planning and so on. China is not that easy today, talking about the trip dividend and our assumptions and planning to be [indiscernible] with the reinvestment rate of 20% to 30% and that's in part of our capital planning. And for new business, again, the 50% are quite stable. And what we saw in -- on the one hand, in March, we are very hard in steering our business. And that's in high capability, we have in our business and also, and that was the case in 2009, 2010. We are also able to go very fast on the rebound and when the time is ready to go for more new business, more than the 50% maybe go back and grow, then we are ready for that. And also the part -- and the younger part has shown us that we are able to deal with capital very fast with several solutions. Hybrid, we have to see what will happen on -- for the scrip dividend at the end of the day and also other things are possible but when we're talking about a 50% level today with the current capital situation with the scrip dividend with, and business, which is also in the crisis profitable. Profitable, means we are achieving a profit at the end of the day. We are well prepared from an equity perspective to go back to the 100% and then we come back to growth -- achieving growth, and then we have to take care for capital planning. That means, we can calculate several scenarios. At the end of the day, we have to see what will happen in reality, and then we can adjust each plan, we can address each handling at the capital market with our several instruments, and then we will do that when the time is right and when we will see that so.And the capital value and probably was there. And I'd also say we can't see any changes today. It's also very stable and to looking forward and to guide that for the year, the level of quarter 1 should be stable. That's fair enough as you go forward with that assumption -- is also a part of our assumption for the rest of the year.
The next question is from Philipp Häßler of Pareto Securities.
Philipp Häßler of Pareto. I have 3 questions, please. Firstly, Germany was very strong, double-digit increase year-on-year. Maybe you could elaborate a little bit what the reasons for this? Was it because your competitors were reluctant in writing new business or did you just put it? Secondly, you're providing a split of your portfolio by object class. Maybe could you also give some more details on the sectors you are lending to. What's the proportion of factors, [indiscernible] and so on and before. And last but least, you were mentioning that the customers benefit government from the measures. They are particularly strong in Germany so am I right in assuming that you particularly benefit in Germany from these measures? Or are they also very strong in other countries like Italy, France, or the U.K.?
Let me start trying to give you an answer on the first question. Regarding Germany, indeed, with the strong growth, double-digit growth we've seen here, as I said earlier, we believe it depends on multiple factors right now. First of all, certainly, looking at the Q1 results, Germany was not that much affected yet at that point, and secondly, and I said that earlier, in Germany, we consistently rely on the longest client and partner relationships. And that's the reason why, given the strong [indiscernible] of the year, the strong investments that we've done roughly in sales, in our sales organization in Germany in the last years, this paid off and paid off in quarter 1. So it will be interesting to see how this develops now given the current circumstances. So what we can see is we are in still in close relationships with most of the partners which did not shut down. In contrary, we can already see that the last days matters in many countries -- in Germany, have definitely intensified the communication again. So this is Germany. As we look at the object classes and the industries you asked, behind those object classes, of course, we have looked at those classes in the first [indiscernible] at the end of season, the first wave, more than in the object classes and categorized also from a risk point of view. What we can see is that the picture, at least in Q1 hasn't really changed to the quarters before, of course. So retail and wholesale, for instance, manufacturing is still -- are still the biggest categories as we look at the portfolio from an industry point of view. Of course, we also have categories like, we call human health and social work activities or accommodation and food services activities with are certainly higher affected right now. But on the other hand, we argue that those, at one point in time, will be the first ones to reopen again, same with [indiscernible]. And therefore, on the mid- to long run, we don't see any major effect on that. And also, what should be interesting, when I look at the figures, when you look at the question or when you try to analyze the forbearance, the forbearance requests of our customers, that there is no correlation really between those from higher -- so-called higher risk class to -- with the higher number of forbearance requests. So you can really see that this is very much independent on the industries or so to say, even industries where you would not immediately assume a higher need for the liquidity or a higher need for requests, are also in a higher amount of forbearance requests or in need of liquidity. I will come to the government for help. What we certainly do is monitoring what's going on in the different markets. As you can imagine that across 32 countries, it is quite difficult to stay tuned because changes are happening very frequently now. So it is quite hard for us to assess right now what portion of our customer portfolio will change from those governmental or even European programs. The only thing what we can say is that, at least this could be an indicator, that given the request we have received or the calls where customers, yes, approached us in March and questioned for help, and the final forbearance rate or the payment rate, you can see that it seems that the need was a lot higher in March and did not really come to the final amount that we could have assumed. So that is an indicator that really many of our customers took this help in the meantime. This is not only developed for Germany and definitely, we assume or we expect that we can definitely profit from those programs.
The next question is from Christoph Blieffert of Commerzbank.
Three questions here from my side please. The first one is on capital and then two follow-ups on asset productivity. So a couple of national regulators have watered down capital requirements for banks. It would be good if you could give us an update on your discussions with S&P. Did they stick to the 15% with adjusted capital ratio? Or can we expect a lower hurdle from the S&P side? And then secondly, on asset quality, just for my better understanding, does the renegotiation of the lease contracts -- does prevent the contract from migrating into stage 2? And related to this, did you find a way to be [indiscernible] EBA moratorium by using European banking license?And as the last question, it would be helpful if you could give us the share of restaurants with regards to your total leasing book.
Okay then, I will start with the first question. So I can't give you the flavor as to say what kind of the portfolio or what part of portfolio are resilient. And so when can we can check that. But at the end of the day, [indiscernible] not important. Especially the restaurant, and we see that in Germany, but not only in Germany, a very creative in going forward as a business, of course, the first shutdown and nobody who are coming at the restaurant and so the business was down. But today, you can go really to each restaurant and take your food home and there are also some delivery services. So there is a very good room and space from the small medium enterprises in that industry to going forward also in their prices. And the asset quality, to renegotiate the leasing contract, it's not that easy. Of course, you can find a way to change the payment structure and that's possible in the stage that contract or clients will be under IFRS 9. That depends on several things, depends on the end of the what kind of score you would give the new contract or the new payment structure. And the main thing is do you see there any changes in the risk structure of the client, that's very important. And not each change in payment structure must be a change in risk. When you see a change of [indiscernible] you have to go and [indiscernible] expected loss [indiscernible]. But I think that we're also more or less and so the future that could be, but it's not absolutely a need to then and walk from stage 1 to stage 2. And we are also taking into account, our leasing business is more or less a short term business and we are talking about some change sales, and we are talking about, let's say, 3 or 6 months and then you will extend 3 or 6 months, maybe at the end of the leasing contract. It's not the same that we are going and making a 48 leasing contract today to 120 month leasing contract. That will be definitely a significant a change. And to Standard & Poor's and the risk of the capital, I can't see any things there that S&P will move back from the 15% of what the payment during the financial crisis that more or less a half figure. And so there are no changes that we have not to hold the 15% risk adopted capital. That's just to say that there are maybe some other things you have to deal with or you can deal with the risk-weighted assets and also what are the operating risks which is linked to your operating results. And so on that, again, there's no discussion with S&P that the 15% are not sustainable. But the 15%, it's not a trigger for 1 day or 1 quarter. It's always a trigger from a long-term perspective. Means when you are talking with Standard & Poor's and you're talking about your -- the capital structure, your risk-adjusted capital, it's more or less looking into the future, what are the opportunities you have to see your capital ratio and when S&P believes that you are able to cover that risk-adjusted capital over the next month and over the next year, then it's fine, even come -- in 1 quarter maybe under pressure because of the risk that [indiscernible] is 14.8 that is not linked to a downgrade in the rating, it's always depending on the perspective and on the future-looking forward from Standard & Poor's.
The next question is from Tobias Lukesch of Kepler Cheuvreux.
Quickly on the asset margin, you mentioned the higher funding costs of 1.5% that you have increased to 2% roughly, if I understood you correctly. Could you maybe quickly elaborate on the asset margin, what you expect here? You're writing that you have a kind of a time lag with regards to potential increase on the asset part, but business-wise, do you think it's already possible, and you talked about higher contribution margins that you're looking at. Is it possible to increase the asset margin already in that downturn? Or would you expect that this is more of an effect after we are through the trough and when we see a strong rebound of the business?
The short answer is yes and it was also shown during the financial crisis and in other periods, but especially in the crisis, when for small medium, medium prices, liquidity is king and leasing solutions are kind of liquidity. You can cover liquidity and then liquidity becomes more and more expensive also for small medium enterprises, not only in leasing, also for bank solutions and credit loans and so on. So it's quite common in that environment that the asset margin will increase and that kind of solutions are more expensive than on the time before.
So could one say that you more than offset even the pressure on the funding side, with that transition, even state of April, May going forward?
That we will see in the future. Our main goal is to stick and stay in new business to stay active in these markets and to cover our higher funding cost in the contribution margin 1, that's important, and the rest of it, we will see when it's possible and when it's paying up from the market perspective. From a competitive landscape perspective, then it could be, but as I mentioned, that we will see important to cover the higher costs in our leasing contracts.
Okay. So it's fair to assume that this happens at the latest in Q3? To fully covered in the leading contract in the new business to kind of reprice it?
But we started it quite soon because we saw a higher interest for new issuings and so we started it. It was beginning per end of March and also in April. And so normally, that kind of development is finished after 3 months. And it depends a bit on the dynamic in debt environment, when we see a higher interest rate and wider rising of cash product again, then we have to do the next set and so on. But the first step, that should be finished in the second quarter.
There are currently no further questions in the queue.
Okay. If there are no further questions, we would like to thank you for joining our presentation. Our new business figures for the first-second quarter will be released on July 2. Thanks, again, for your call, and please do not hesitate to get in touch. Thank you again and goodbye.
Thank you.
Bye-bye.