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Good morning, ladies and gentlemen, and welcome to the GRENKE AG conference call regarding the second quarter results 2020. [Operator Instructions] Let me now turn the floor over to Anke Linnartz.
Yes, good morning, ladies and gentlemen, and welcome to our earnings call for the second quarter. With me today are Antje Leminsky, our CEO; and Sebastian Hirsch, our CFO. We are presenting a set of slides to accompany our remarks on this call, and the press -- and our presentation, the press release and the quarterly report are to be found on our website under grenke.com/investor-relations.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 we take it as read into the record for the purpose of this conference call. Please note that this call is being webcast live and will be archived on our website. Our agenda for today starts with the presentation by Antje Leminsky. She will hand over the call to Sebastian Hirsch. After that, we will have time for a Q&A session. With that, I pass the call on to Antje Leminsky.
Thank you very much, Ms. Linnartz, and good morning, ladies and gentlemen. Welcome to our call. Well, the first half of 2020 has been quite a wild ride for all of us. But even during these times of stress and uncertainty, I can tell you that the GRENKE team has not let off the gas pedal. We have continued working hard to improve our products and our services, and we've also adjusted our offerings to the changing customer needs. We saw first pickup in new leasing business in June after a subdued development in April and May. And more than that, we are happy to share that the pickup in new leasing business persists in July. So here's what we've accomplished in the second quarter and a few things we've created to further support our customers. First of all, we've opened a new franchise location in the U.S. on April 1 and recorded first revenues from our team in Phoenix, Arizona. We also enhanced our cooperation with KFW, and as demand for our joint solution has further increased these times. We developed a system to automatically handle payment deferrals, which, by the way, peaked in numbers in April and since then substantially came down. We've also started to intensify the use of robotics in order to even further automate a lot of our business processes. And through the use of this so-called RPA technology alone in the last 18 months, 14 so-called intelligent robots were brought to start, for instance, in the area of payment deferral request processing. This makes work more attractive for our employees, avoids mistakes, and above all, leads to faster results for our customers and the competitive advantage for the GRENKE Group, and that's what counts.In a nutshell, in quarter 2, 2020, new business came down as we expected, and we saw signs of an upturn in June. And we recorded a strong increase in new business of GRENKE Bank based on the demand for corporate loans. This is still small numbers, but it once more proves our diversification strategy to be the reasonable choice. And last but not least, we are approaching our annual meeting that is scheduled to take place next week on August 6. It is our 20th AGM since GRENKE went public, and as you know, we will conduct the meeting as a virtual AGM. Of course, we would highly appreciate if you would make sure to exercise your voting rights as well, and thank you very much for that.So please move on with me to the next slide for a quick read-through on our key P&L figures for second quarter. Net interest was recorded at plus 8.8% and reached EUR 98 million. The settlement of claims and risk provisioning stood at EUR 62.2 million, a steep increase by 92.3%, driven mainly by risk provisioning rather than by the settlement of claims. That's a very important difference. However, this was the swing factor and weighed on earnings. As a consequence, our net profit came down to EUR 14.2 million compared to EUR 34.4 million in the second quarter 2019. All in all, we believe we deeply are presenting a sound set of results, and Sebastian, as always, will walk you through the details later on.So now I will review our guidance for the remainder of the year. We have already communicated it on July 2, 2020, upon the publication of the new business figures for the second quarter of 2020. The impact of this pandemic on the further development of our business and earnings of the GRENKE Consolidated Group cannot yet be assessed with any certainty. It was not taken into consideration in our guidance for 2020 financial year that we have published, as you know, on February 11 this year. In light of the general economic restrictions resulting from the pandemic, we are currently assuming that the level of new business in the third quarter of 2020 will amount to roughly 70% of the prior year's new business level. Please be advised, at this point, we unfortunately have to correct our corporate news, which we've released this morning. As stated correctly in our financial report in Q3, we are expecting 70%, not 60%, of the prior year's level of new business. Sorry for the mistake. At least, the message is positive. Coming back to our guidance. We will update it for the 2020 fiscal year as soon as we have gained sufficient clarity and as soon as we can fully assess the effects of the COVID-19 pandemic. And of course, we'll keep you posted on that. But what's important to remember is that our business is scalable. We can operate profitably with the lower volume of new business and appropriate cost savings. That's what we've proven even before. As a result, net profit will be below the target range of EUR 153 million to EUR 165 million that we have announced at the beginning of the year. Despite the need for appropriate cost savings, we want to retain our ability to react to any easing or normalization developments of the market, of course. So to sum it up, against the backdrop of the pandemic, we recorded a solid set of results in quarter 2, 2020. However, as of today, we are fairly optimistic given the fact that we had a good start into the third quarter. So now I would like to hand over to Sebastian Hirsch, who will lead you through our financials. Sebastian?
Thank you, Antje. This is Sebastian speaking. And also warm welcome, and good morning from my side to all of you. And I would like to take you through our financial results and some figures per end of June.Let's start with a short dive into our new business and so we would like to start with the new business figures and the contribution margins. As all of you know, it was a special quarter 2 because of the pandemic, as Antje mentioned, and the new business dropped by 45% in Q2 2020 compared with Q2 2019. We see that in the bar in the left-hand chart. We see there also our contribution margin 1, and it decreased to EUR 48.5 million, but with a quite stable contribution margin of 12.1%. And that's a very important and good message that, that it is stable and we have to take in account the higher funding costs, which are priced in the contribution margin 1 for Q2. The contribution margin 2 of new leasing business on the right-hand chart, in absolute terms, fell in the second quarter of 2020 to roughly EUR 70 million but, as I said, only by 42%. And due to the lower decline in contribution margin compared to the development of new business, CM2 margin rose to 17.5% in the second quarter 2020 in comparison to 16.6%, Q2 2019. And the higher CM2 margin was primarily a result of the measures we took already in Q1 2020 to have a higher proportion of very profitable small ticket business. This was also recorded across all regions. The higher contribution margin 2 gives also room and space to absorb higher risk -- potentially higher risk at that time. And to summarize our new business is that we are already focusing on achieving profitable new business also at that time.On the next slide, and you are aware of that picture, on the upper part, we see the CM1 and CM2 again for the new business of the first half, year 2020. And the chart below shows us the P&L for the second half of the year 2022. And in our P&L, I would like to point out a settlement of claims and especially the risk provisions, as Antje mentioned, in the next chart. So let's focus on this chart on some other issues. The interest income rose by 12.3% over the half year, a bit lower because of the development in new business. So the volume development is also part of the interest income at the end of the day. The profit from service business is more driven from the new business growth and the volume of the previous period. And so there is a good growth as it was in the last quarter.Profit from new business declined to EUR 23 million and reflected the drop in new business in the second quarter of 2020. But this is still in line with the cost development. And Antje mentioned some things to the cost end. We've seen a decrease of all operating cost positions in the P&L. The staff costs in the second quarter fell by roughly 8% to roughly EUR 20-odd million compared to 30 -- roughly EUR 30 million in Q1 2020.I would mention here that we did not have any COVID-19-related layoffs from our staff. We stick to our staff. And therefore, we shift work a bit. And with our employees together, we are ready to handle more new business as soon as the macroeconomic environment will allow that.Our cost income ratio with the new method, we -- as we communicated during this year's analyst conference on February, means without the settlement of claims and risk provisioning in the income, this was 42% for the first half of the year, absolute in line with our expectations. And as Antje mentioned, we stick to our goal of having a cost income ratio below the 46%.And now in the next slide, we will come to settlement of claims and risk provisions. You know that the chart on this slide, we had a few of the development of risk provisions and settlement of claims since 2007 as our loss rate. And in the bar, you see our volume of leased assets means volume under management. You can see the development of the loss ratio over the past decade, and you have to keep in mind that we did not have to apply the IFRS 9 rules back then. Since 2017, IFRS 9 is in place. IFRS 9 impact is part of the loss rate, not for the periods before. And IFRS 9 impact before the crisis means that prior crisis level was roughly 25 basis points in the loss rate that we have to take in account. And that IFRS 9 impact, it is a risk provision for expected losses and expected losses related to all running contracts, means there's no default, no trigger event for default. That's why, as Antje mentioned, it's not a settlement of claim, it's only a risk provisioning. And the increase of that expected losses due to the COVID-19 pandemic led to a higher amount of settlement of claims and risk provisions at all. And especially the proactively risk provisioning in accordance to IRFS 9 drove this in Q2. And the aforementioned increase in risk provisions in accordance as at IFRS 9, particularly in the markets France and Italy, that's because there is our volume pretty high because of the new business over the last years. And you know that France, Italy and Germany are our main markets from the volume perspective. And that led rise of settlement of claims and risk provisions to EUR 62 million in the second quarter compared to EUR 51 million roughly in the first quarter 2020. That means that all was EUR 130 million risk provisions for -- risk provision and settlement of claims for the first half year 2020. And the impact of IFRS 9, I tried to describe, means the expected losses for running contracts only is roughly EUR 50 million for the half year. And as I mentioned, this is technical because we did not change our model yet. We stick consequently to the risk model under IFRS 9, which brings us more conservative risk provisioning on the balance sheet and P&L.And finally, all contracts with missed payments but running contracts. And from our today's perspective, there was the peak in April for the missed payments. That contract went into a higher risk level under the IFRS 9. And that higher risk level brings us the higher risk provisioning and how much of that expected loss return in real risk provisioning and settlement of claims for bad debt and how many contracts will turn back into a better risk level, we will see over the next quarter.Consequently, the Group's loss rate increased to 2.5% in the first half year compared to 1.6% for the first half year 2019. And so the main increase is driven by IFRS 9. The increase was also the increase in our loss rate due to the minimal growth in the volume of leased assets because we have to reflect always both sides of the matters from the ratio. On the one hand, the risk provisioning and settlement of claims, on the other hand also the volume of leased assets. And the rising of that volume was pretty lower than in the past, means with rising new business, we will automatically see a lower loss rate. And together with the experiences from June and July in accordance to the payment behavior, which show us the first sign for recoveries compared to April 2020, we calculate with a loss rate for the whole fiscal year up to 2.3%.So after the loss rate, let's take a view to our equity. And the equity ratio today is 16.6% and -- compared to 17.5% per end of December. And this was mainly due to the increased amount of cash we carry and -- which is mostly from the deposit business of GRENKE Bank, means we are well funded for the next months that we see on our liquidity. So we can go for new business and will not immediately need funding. So the balance sheet should not grow significantly for the next roughly 2 -- EUR 500 million new business volume. I would like to add there that we are still above our target of having an equity ratio of at least 16%. From a regulatory point of view, our total capital ratio according to the CRR is fine, and we are well-prepared for all capital requirements we have and we would like to fulfill. And last but not least, our funding mix, the current state of our funding mix. And as you know and you see in our report, there was a slight shift in our funding mix per end of June. And roughly 55% of the funding mix in the senior unsecured box; roughly 29% was GRENKE Bank, especially the deposit business, very important here; and 16% is asset-based, means we stick in each box, we are active in each box, and that's important for our business. But very important too is the strong liquidity and the ongoing opportunities. We know how to deal with troubled circumstances. It's proven. And the bank is the main part of this strategy. That's why the deposit business to-date is rated higher than in the previous periods. And also the access to the promotional banks, Antje mentioned, also the KFW gives us space to fund business and to support our small, medium enterprises. So thank you very much.
So thank you, both, Antje Leminsky and Sebastian Hirsch for your presentations. We are now ready to take your questions, so please register and recognize so we are ready to go.
[Operator Instructions] And the first question comes from Johannes Thormann, HSBC.
Johannes Thormann, HSBC. Two questions from my side. First of all, on your new business volumes, when you guide now for 70% in Q3, when do you expect the new business volumes to be back at the 2019 levels or above? And also as we look at the factoring business and the banking business, banking business did extremely well in Q2. How sustainable is this increase and how should the factoring business in terms of new business develop in the next quarters? Secondly, could you provide a breakdown of your EUR 62 million risk costs by stage 1, 2 and 3? How much was in the different buckets?
Mr. Thormann, thank you for your question. I take the first one. Well, new business volume, as we stated, is on the way up. That's what we see clearly in July. However, we feel it's much too early to assess when we will be back on the 2019 level. And that's what we also call the normalization. Certainly, we work with scenarios, but it's not the right point in time so far to give a clear answer on this question. Regarding banking and factoring, indeed, also these 2 areas, and this is part of our diversification and clearly a good time for our product -- that product offering that we do in terms of the solution we provide. It's on the way up. We can see this especially looking at the bank that a lot more corporate loans, a lot more deposit business, but also a lot more start-up loans in cooperation with KFW have been given in the last quarter. We've reported on that. Same with factoring, which again is very valuable for many of our customers to be used at this time. Again, to predict what exactly the development will be towards the end of the year is fairly difficult. It depends not only on us. It depends on the pandemic. It depends on state programs that might give direct help as well to those customers. But whatever we can do to support it, also in cooperation with those promotional banks, also given the global loan, not to forget this one, that we work with the KFW since 2017. One program is still running with substantial number of contracts, a total of 35,000 contracts we have insofar in the current EUR 200 million global loan. With the KFW, we continue that, and this is also a very important factor for our customers to be used right now.
Yes. And to the risk levels under IFRS 9, you will find that -- their picture on the table on Page 27 in our notes, so Stage 1, Stage 2 and Stage 3. And in Stage 3, there's also all settlement of claims are involved there. And when we're talking only about risk provisioning for the running contracts without default and trigger event for default, some Stage 1 and Stage 2, each of them, roughly 30%, and Stage 3, roughly 40% of the IFRS 9 risk provisioning.
And book in Q2?
In -- for the half year, yes. You can find that...
No. Yes. And for Q2 only?
For Q2, it's a bit higher. The risk provisioning for Stage 3 there, it's roughly 50%, and Stage 1 is a bit lower.
The next question comes from Marius Fuhrberg, Warburg Research.
So first of all, on the loss rate, you reported 2.5% for the first half of the year now. It's like 2.3% for full year. What makes you so confident that losses will not increase further in Q3? To my understanding, we saw a lot of governmental aid in the past quarter. And I could at least imagine that we will see a higher -- more companies filing insolvencies still in Q3. So a little bit more color on this would be nice. Secondly, on the new business, you reported that you saw already 70% in -- of the new business in July. So don't you think that we, with regards to new business, indeed, see a further improvement in Q3, as all given that we do not see a second wave of the pandemic. So given that we are improving in terms of the economic health, that we should be slightly or even well above 70% for Q3 and even Q4?
Okay. So let me start with your last question regarding the new business volume. As I said before, the further path is hard to predict. What we can see is, of course, differences from country to country. A stronger new business in Germany, for instance, a little more effects due to the pandemic in the last months but also in the previous weeks in Southern European countries, such as Italy, Spain or even the U.K. So it's absolutely right. We are depending on the further course of the pandemic. What we can see is that 70% is a realistic number from today's point of view. Also, given the comparable quarter 2019 where we had a strong July also and so reaching this level right now gives us the comfort to look ahead and be optimistic that this should be a level that we come in at the end of the quarter. But of course, it will be depending on the effects that we see after summer, and we will better know that probably towards the end of the -- of September, end of the quarter 3 and beginning of quarter 2 -- quarter 4.
I will come back to the loss rate and your question. Of course, it's right, at the end of the day, the development of insolvencies and so on, we will see in the future. But that's very important to understand that IFRS 9 method because that's like a leading indicator and not waiting for insolvency. There the first one to measure is a missed payment. And that's very important for IFRS 9. That means it's a very proactively risk provisioning under IFRS 9. And the second point, which gives us comfort is look in our own portfolio, in our own data, and we saw a peak in missed payments in April. July is quite better than April. It's not pretty normal, but it felt more normal than April. And also the request for deferrals agreement, there was also a peak in April, and that came down over May and June. And today, in July, the request of -- for deferrals, for forbearance is not that high. So at all, the payment behavior changed more to a normal level. Of course, we have to deal with the missed payments. We have to deal with deferral agreements, but again, IFRS 9 gives us a leading indicator, which is very proactively and show us a high-risk provisioning. And looking back in our data that our clients come back to business, and new business is going better from the level. That gives us comfort for a better loss rate. And when the volume comes back to a more normal level, we're talking now about 70%, then automatically, our volume of leased assets will rise, and then automatically also the loss rate will be lower because of rising volume.
Okay. One further question, if I may. On the IFRS 9 you just mentioned and also the loss rate, in 2009, we saw coming -- the loss rate coming down over years. And as the loss rate now -- or as the risk provisioning is now so proactive due to IFRS 9, should we expect the loss rate to come down more or faster due to -- or given the fact that we will not see further worsening condition in the broad economy over the next years, I would say?
Over the next -- somewhere before we tried to look back to -- or we'd like to look forward to 1 quarter or 2 quarters. Now we would like to look forward to -- for the next year. It's not that easy to say, but when everything is normal, then of course, the loss rate has to come down because risk provisioning under IFRS 9 will normalize. Today, you have a risk model, you have a parameter, especially the macroeconomic parameters are very bad. And that's -- automatically that then show your risk model at higher risk. And when everything will be okay, then automatically, the IFRS 9 for new leasing contracts, for new business will come down. That's the first thing. And the other thing, it depends on how right IFRS 9 risk provisioning is and how many contracts and lessees will turn into settlement of claims and bad debts and how many customers, lessees will turn back into a better risk stage on Level 2 or Level 1. And that's not that easy to say that depends on the ongoing development.
The next question comes from Mengxian Sun, Deutsche Bank.
So 3 questions probably from my side, one on excessive cash and the second one on nonperforming lease receivable, and the last one on new business recovery. So on the excessive cash side, you have quite a large amount of cash balance on the balance sheet, and given a low level of new business originated in Q2 and probably also in Q3, as you mentioned. So my question is, how are you going to plan your funding structure going from here? Are you going to use the cash probably to buy back some bonds and optimize the funding structure? Or do you plan to use the cash to set aside and use it for the future new business? And the question on the new nonperforming lease receivable is that the proportion of nonperforming lease receivable increased to a higher level. If I didn't calculate it wrongly, that increased from 7.2% in average in 2019 to above 8% in this quarter. Could you give us some more color on the driver of the changes here and your expectation for the following quarter? And the last question on a new business recovery is that, was the 70% recovery across all regions, or do you see a different pace of the recovery across different countries? Could you give us more color on that point?
What if I just start with your last question, again, regarding the new business recovery. As I said before, we've seen differences in the last quarter already. I gave you the example of Germany, where we, for instance, only had a minus of 15.2% also due to the basis effect, of course, as other countries reported higher growth rates in the past, while Italy or Spain were clearly below the 50% that we have guided as an average in terms of what we expected for Q2. We finally came out at 45.2% on a group level as we said before. And of course, we expect pretty much the same development, so a difference by country -- country-by-country for Q3 as well, which then sums up to the reported 70% below the prior year's new business volume.
And I will take the other 2 questions. First, cash. So plan is to use cash for new business and not buying back bonds or something like that. So we would like to use the cash. And of course, I think for that year, the cash position will be a bit higher than in the previous years because nothing is for sure today. And so we are a bit more careful as it was in the previous year. But the main message is we will use the cash for new business. And for the nonperforming loans, I'm not really aware how you calculate your figure. You have to take into account, on the one hand, of course, we had also some terminations, and we have also a rising in settlement of claims because of the growth over the last year. And of course, there's a little impact of the pandemic, too. And when you calculate the unperforming loans in percent of balance sheet or in percentage of the whole lease receivable, then you have to take into account that the unperforming loans of today are driven from the new business of the last 2 or 3 years. And the leasing receivables -- the whole leasing receivables, especially the performing leasing receivables, are also driven by the new business, means the decline in new business brings us a lower growth for the performing loans, for the performing leasing portfolio, and the unperforming leasing portfolio is ongoing, as always, because of the strong growth of the previous years, and then you calculate the ratio. And then it's not -- the driver is not that unperforming loans. The driver is more the lower growth on the performing loan and then on the whole balance sheet. And that's why that figure goes from roughly, if I remember right, 8% to 18%.
The next question comes from Andreas Schäfer, Bankhaus Lampe.
Yes. Just one question regarding your asset liability management. I guess that the net inflows from GRENKE Bank have a rather shorter duration compared to your liabilities. So are you still completely matched in terms of asset liability matching? And second question is, if your new business stays relatively low for the next 2 or 3 quarters maybe, and you're just going to have, again, for quarter 4, EUR 500 million inflows from GRENKE Bank, how do you see, let's say, potentially too high inflows? I mean, it costs you a lot of money to have more than EUR 1 billion in cash on your balance sheet.
Yes. First, the asset liability management. That's right. Duration of GRENKE Bank and especially the deposit business, you have to take into account, is a bit shorter than our average duration in the portfolio. But we steering our portfolio duration from a group level means a macro level, and at the end of the day, it's important the whole mix or the whole funding mix, and then we go for 5 years' bond. The 5 years' bond has longer durations in our leasing portfolio with the 48-month roughly on average and amortization. And the GRENKE Bank deposit business with 2 years or something like that has a shorter duration. At the end of the day, we are always looking to well-match funding from a group level so the liability duration is well-matched to the asset direction. The second thing, of course, it's right, driving high liquidity costs money. That's right. But for us, it's more important to driving higher liquidity and being ready to take off when new business will come back to former level because when we are not ready to take off and when we not have enough liquidity when the macroeconomic development will change and we can go for more business, that's much more expensive from our perspective for us and for all the shareholders too. And so we go for a bit more liquidity, but that means we are ready for takeoff to go for more new business. And as I mentioned, we will use today's liquidity, and for the next EUR 500 million new business, we will not need further funding -- further new funding. And so we are well-prepared for the future.
Can I ask a second question?
Sure. Please, go ahead.
Okay. It's just regarding your profits from -- or your service profits. They seem to be at least more stable than I thought that could be in a quarter with very low new business volume. Could you give us some sort of guidance on how your profit from services will develop in this year?
For each part of the P&L, it's not that easy, but the profit of services is more driven by the existing business. And so a good driver to calculate profit of service business is the volume of leased assets, the number of running contracts because that's a number which drives that figure and means the settled business through the end of this year is more important than the new business for the running year.
The next question comes from Gerhard Orgonas, Berenberg.
I'd like to come back to the risk provisioning as well. It seems to me that Q2 was the peak also in terms of IFRS provisioning. Could you -- and on a sequential basis, if the macro environment improved slightly, could we see a sequential improvement of the settlement of claims and risk provision? So like the EUR 62 million was the peak for this year, and this should slightly come down over the next couple of quarters on an absolute level?
It depends on the further development, yes. And we give you flavor for the loss rate, which is 2.3%. And that's not that easy to say because it depends on new business development because, for each new contract, we have to take in account in IFRS 9 and expected loss too under the pandemic with the macroeconomic parameters of today and the payment behavior -- the further payment behavior from the existing business. That will be the decision maker, and as I mentioned before, which contract would turn into a better risk category or turn in settlement of claims. So it's not that easy. When we go forward, I can repeat the 2.3%, but we can't pay what the development of settlement of claims in euro will be because it depends on many parameters and macroeconomic parameters on the one hand but also on the volume in our book.
Okay. What is your current accounting policy for missed payment? I think in Q1, you had -- on the call you have stated that you have extended overdue payment's time lines in Italy, for example. How does that work at the moment? And what percentage of payment is actually overdue more than a month at the moment?
The overdue -- and that's the measure for Stage 3, for the risk Level 3 under IFRS 9 is 90 days, but that's not our model. It's a given line by the standards. And our process is that we are always looking to the relationship with the client. We try to look to the whole situation. That means not each contract with a delay is running in a termination and running in the settlement of claims because, for some clients, the bridge is very important and very helpful. And that's the thing we saw, also in July, that some clients were able to pay back open amounts of April in July. Of course, only some, but it's a good sign for us. And so the policy is stable under IFRS 9 of the 90 days. And the internal policy there, we are looking to the relationship. We are looking to the client. And we are going into -- to measure the risk and making the decision. If we can go for deferral, we can go for a further delay, or we have to go for termination.
Very much history database as well.
Okay. And last question on the equity ratio, please. You said you're confident that you don't need equity immediately to grow the business, but you have -- your equity ratio has declined by 90 basis points. To continue this run rate, we will be below 16% by the end of this year. Is there something that will allow you to stabilize the equity ratio in the 2 coming quarters, or would you then envisage to properly raise some capital towards the end of this year?
What allows us to keep the equity ratio stable is to taking the cash and making new business. Then we will have a shift from cash to leasing receivables and no balance sheet growth. I think that's the main thing that we have to take in account, looking today to the equity ratio under the balance sheet, a huge portion of liquidity and cash that gives us an equity ratio of 16.6%. And so as I mentioned, we can take the cash and turn the cash into leasing receivables, so that will mean that we will not see significant growth on the balance sheet.
And the next question comes from Christoph Blieffert, Commerzbank.
I have a couple of questions on asset quality, please. And let's start with some number questions. First of all, on payment deferrals. Could you give us a number of contracts with payment deferrals at the end of the second quarter, please?
A number -- what we can say is that the portion of the portfolio of the running contracts is roughly 4%, 4.5%.
So 4.5% does compare...
4.5%, yes.
Does compare to the 33,000 of contracts which have been in deferral at the end of the first quarter, correct?
I think you mentioned a number of 33,000 contracts, right?
Correct, in the first quarter.
Basically, on the occasion of the publication of our Q1 results, but this was not a figure referring to the first quarter because in the first -- during the first quarter, there were no deferrals. This was actually driven by the pandemic. This was a figure that we reported, I think, 4 weeks later, on the -- basically, the history that we saw in April.
Yes.
Okay. This is an end of April figure, correct, the 33,000? And the end of June figure? I mean, what you have said in the press releases is that the number of new...
Roughly 50,000.
50,000, okay. And if we take the 50,000 -- the roughly 50,000 contracts, which amount of risk provision is booked to these 50,000 contracts.
So I can't point out the risk provisioning for that contract. We can go through the table in the notes for the risk provisioning but not for that excessive -- for that 50,000 contracts, yes.
Okay, just to get a better understanding of your policy with regards to deferrals. So how long do you defer the payments in the leasing business? How long do the -- the customers do not have to pay for how many months?
Normally 2 periods. Depends on monthly payment or quarterly payments, normally 2 periods we go for deferral to installments.
Okay. And your deferred leasing exposure. Is this booked in Stage 2?
No.
Okay.
The deferred leasing exposure is booked in Stage 1.
Okay. It is booked in Stage 1, okay.
Yes, it's -- to take into account the deferral is -- it's like a credit decision for us. It's not an automated process that each lessee will get a deferral. So we are looking to the request. We are regulating the request and then making a credit decision.
Okay. And when you look on your deferred leasing exposure, what is your assumption with regards to a potential insolvency rate going forward?
Not that easy to say. As I mentioned, we had the first deferrals -- first lines which pay back the deferred installment. And that -- what we can say is that a deferral agreement is not only a negative issue. It's -- sometimes it is a bridge. It helps the client, so we can't say and measure today what portion of insolvency will be in that portfolio.
Okay. And when I look on Page 27 in your quarterly report, then it's quite obvious that Stage 2 exposure is up some 35% versus year-end 2019, and this despite a significant numbers of deferral agreements and also the suspension of the insolvency loss in many major European countries. And I'm just wondering, looking on your -- I mean, you have given us EUR 50 million of IFRS 9-related risk provisions in the first half. What makes you confident that this is sufficient coverage to cope with the larger insolvency wave at the end of the year?
On the one hand, when we go through IFRS 9, it's a method. Of course, we have the deferrals on Stage 1. On the other hand, we have a lot of clients. And when we're talking about 4.5% of running contracts with a deferral agreement, we have 95.5% of clients and running contracts without. And that's a measure we did not take in account. On the one hand, the deferral agreement is not take into the model because it's not measurable today. And of course, there are no experience, but also the good message that the clients which are paying without reminder, without missed payments, without deferral agreements in that crisis is a very positive thing that's also not reflected under the IFRS 9. And of course, we have some clients with missed payments. We measured in April that clients are in Level 2 or Level 3. And we saw now in July that some of the clients are able to pay because it's open installments means not each client with a missed payment, without any deferral is running in a settlement of claims or running in a termination. And that gives us a flavor that, from a portfolio approach, the approach we took under IFRS 9, under the risk model, is okay. Of course, in each level and when you're looking to single contract, to single groups, you can measure a bit better, a bit lower or a bit higher. But from portfolio approach, we are comfortable with that.
Okay, and then a last question on net interest income. And maybe you can help me or give me again indication how to model it going forward. I mean, new business, it's down and will further come down. The regional mix is changing, so more exposure to Germany, which I at least expect should have some lower lending rates, and then on top, the payment deferral. So when should we expect net interest income to slide down from a timing perspective?
That depends on the ongoing new business. It's not the same if we're talking about 1 quarter on a level of roughly 50%, 55%. And when -- it depends on how soon we would come back to that level. You will see that the new business of that quarter 2 will bring us lower interest income than the previous quarter, that's for sure. And we are now saying roughly 70%. We are looking forward for the third quarter. That means over the next quarters, we will see a lower growth in interest income. And that depends on, are we back on the 2019 level per end of that year, beginning next year. That's the main question because, when you look from a portfolio perspective, and we're talking about a 48-month leasing contract or leasing portfolio, then -- when the next quarter will go in the portfolio, means the second quarter in 2020, then the quarter 2, 4 years ago, went out of the portfolio. And then it depends how the growth between that 4 years was. That's the main question. On figure of the growth of Q2 2020 to Q2 2019, you have to look back roughly 4 years before, maybe 3 years because the duration and amortization you have to take in account, but you have to look more back 2 or 3 years and not only 1 year, then you can model that, I think, very good.
The next question comes from Tobias Lukesch, Kepler Cheuvreux.
A couple of follow-ups from my side as well. Firstly, touching on the risk costs. You mentioned the IFRS 9 impact EUR 50 million. I was wondering, could you remind us of a model impact from GDP forecasts. If I'm not mistaken, I expect that GDP model inputs are not really changing the provisioning of your portfolio, not the new business but the portfolio as most banks are currently provisioning general reserves on that issue. I was just wondering, if this also has an impact or if there is no model impact kind of general provision in that. Then also on the NII, thanks for the explanation. I was just wondering on deferrals. What is exactly the time value of money impact that you're currently seeing and that you are expecting for 2020? So my understanding is you have -- you write less new business, on the other hand, you extend current loans for 2 months up to 6 months. What exactly is here the time value of money you're losing on that? Thirdly, on disposal losses. So far there has been no real change. How would you see market developments on that side as a total. But also product-wise, are there some assets of your asset mix where you saw stronger shifts with regards to selling prices, et cetera?
Okay. And I start with the first two questions minimum. At first, risk cost model under IFRS 9. Of course, as always, when we're talking about our risk models and our expected losses, our contribution margin calculation and so on, and we know that GDP is not that important for us. But when you build a risk model under IFRS 9, you had to take in account macroeconomic parameters. And we did not take in account the GDP, that's right. So the GDP forecast is not that hard an impact for our model, that's for sure. But we have macroeconomic parameters country-wise in place. And that gives this the same direction like the traditional macroeconomic parameters. And as I mentioned, we did not adjust the model. We did not -- proven again what are the impacts in that pandemic in the crisis for all the parameters we have in our model because you can't do that today. You need experience. You need data, and then you can do that. You can measure that, and then you can build up a new model. And that's -- it's the same for the next question. If I got the question right, the question is how much money we will lose because of the deferrals or what is the right valuation for our overall receivable. I can say again, from a portfolio approach, we feel comfortable with that figures. Otherwise, that will be other figures, that's for sure. And of course, there could be that, for a deferral or a leasing receivable as a deferral, on a single contract basis, the loss will be a bit higher than the today's shown expected loss in our P&L and in our balance sheet. But again, for all the contracts without -- and deferral and for all the contracts without any payment trouble, whatever, during the pandemic, the expected loss under IFRS 9 today is too high. That's also for sure because a client which is able to pay during the pandemic all leasing installments, a client which is very healthy ongoing in business, and we are very diverse in several industries, there are no trouble. And there, we know that the risk provisioning under IFRS 9 is too high. And overall, from a portfolio approach, we think the valuations we've shown on the balance sheet and on the P&L today is fair.
Okay, I take your last question. If I got it right, regarding the asset portfolio. Are there any major changes? What is to expect? What you can see also in our financial report is that the structure of the portfolio has not fundamentally changed. We stick to our strategy to focus on IT products in the first place, coming to a level of 63.6% of the total portfolio. Also medical technology, as in the previous quarters, on a good level of 8.8%. Now machines and systems was 21.4%. And the rest is security devices and others -- and part of others. Again, e-bikes, that, especially in these times, where people like to be out in fresh air rather than in buses and trains picked up a bit. So what you can see is that, from an overall perspective, the structure of the portfolio hasn't changed, although, certainly, some industries, some -- yes, some industries have become a stronger presence in our portfolio than others. Certainly, we've adjusted the risk assessment of the different industries. But it didn't have effect on the asset portfolio from a structure point of view.
Yes, and from the secondary market price view, I was more wondering about disposal losses -- potential disposal losses that might be due to less market demand for that kind of secondary assets going forward. I mean, is there any change in your assumptions? Or are you still very comfortable that you will have similar prices as we've seen them over the past years?
No, there's no change in our assumptions also from -- to the figures. It's quite stable compared to the previous period. So no change in pricing for the asset. No change in our estimation, and that we can also see no change in behavior of declines who are buying that assets.
Yes. And the last one, if I may. I mean, I was wondering a bit why you did not opt to comment on new business growth in Q4. It's -- I mean, at the end of the day, it's very difficult to really predict even August, to be fair. However, with the calculations we're all probably doing, is it fair to assume that at least you will expect similar rate for Q4 than you have now guided for Q3, or is there way too much uncertainty to provide that further hint?
Yes. I think it's very easy for you. You can take the macroeconomic environment in Q2 and Q3, and we had roughly 50% in Q2, 70% for Q3. And whatever you meaning is about the future for Q4, you can model whatever you want and so you can go forward. I think that the best way we can give you because we don't know what will happen. And we are looking, from a short-term level, for the next month. We are prepared for nearly everything. We know how it works, liquidity management and asset management, whatever. So when you would like to model Q4, go ahead and make your own opinion about the macroeconomic environment, and then you can take the figure Q2/Q3 in relation to that, and you can model your own figures. We can't do that from today's perspective.
And we have no further questions from the audience.
So if there are no further questions, we'd like to thank you for joining us for our call today. We'd like to thank you for your support. And please make sure that you will be with us on October 29 when we will be presenting our results for the third quarter. Thank you so much, and goodbye.
Thank you. Bye-bye.
Thank you.