Grenke AG
XETRA:GLJ
Earnings Call Analysis
Summary
Q2-2023
Despite a challenging macroeconomic climate with high inflation and rising interest rates, GRENKE AG reported a confident first half of 2023, with new leasing business at EUR 1.3 billion and robust group earnings of EUR 40.4 million. The company has confirmed its guidance for the year and projects further growth in 2024, anticipating new leasing business to scale between EUR 3.0 billion and EUR 3.2 billion with group earnings targeted at EUR 95 million to EUR 150 million. GRENKE has successfully increased its CM2 margin to 16.9%, achieving a nearly 17% target level and an 11.4% growth in operating income. Amid these factors, GRENKE upholds stable average lease contract sizes and terms, signifying consistent performance through economic headwinds.
You don't have any saved screeners yet
Ladies and gentlemen, thank you for standing by. We will now start the GRENKE AG conference call. I would now like to turn the conference over to Anke Linnartz. Please go ahead.
Welcome, ladies and gentlemen, and thank you for joining our call regarding our Q2 results 2023. My name is Anke Linnartz. I'm Head of IR, and with me today is Dr. Sebastian Hirsch, our CEO. We will start the presentation, and we'll have time for Q&A right afterwards. Just to remind you, throughout today's recorded call, all participants will be in a listen-only mode. With that, I would like to pass the call on to Dr. Sebastian Hirsch. Dr. Hirsch, the floor is yours.
Yes. Thank you, Anke. A warm welcome, ladies and gentlemen, and thanks for joining us today to our conference call. Ladies and gentlemen, times are challenging with macro perspectives getting more and more cloudy and inflation rates being still high and the level of key interest rates being on the rise. As recently published by a German ifo Institute, recession concerns in Germany are increasing and went up for a third time in a row. And that's not only in Germany, we see that in the relevant core markets for GRENKE, too. We so roughly analyze the situation with regards to our new business leasing with our growth targets for this year and for the upcoming year 2024. Clearly, our strong growth focus presented quite of a challenge, and we decided to adapt our market assumptions and our outlook for 2024 because of the macroeconomic environment. I'm sure you all saw our announcement that we issued yesterday. So for 2023, we are well on our way, which you can see -- also see in our numbers which is why we are reconfirming our guidance for 2023. We are very happy with our results of the first half of the year and the second quarter. New leasing came in at EUR 1.3 billion for the first half of the year and group earnings with EUR 40.4 million. And that gives us confidence to confirm our guidance for 2023. For 2024, the next year, we updated our outlook and adjusted it to market conditions. We expect our leasing new business to grow. It's important we expect it to grow now to EUR 3.0 billion up to EUR 3.2 billion. So we would like to cover the EUR 3 billion new business leasing first time in GRENKE history. What you can see is that we continue on our profitable growth path. Our update still accounts for a growth still 11% to 19% on a higher base, of course, and in a very challenging macro environment. And that reflects, first of all, the macro view I described but it reflects also our internal view, our view to the market as we see a stable investment behavior and the opportunity to achieve a healthy double-digit growth in leasing. Evidently, we expect our group earnings now to come in, in a corresponding level. For our group earnings, we target for 2024 EUR 95 million to EUR 150 million, and that is linked to the development in new business for '23 and '24 as well. On the macroeconomic level, we see and saw also in the last quarter, and the upcoming quarters will continue to be challenging. Inflation in our markets remains high and interest rates keep increasing steadily. ECB just recently announced further increase of key interest rate to 4.25% in July '23. But the interest rate policy and above all, the speed of interest rate adjustments is different in Europe in the different countries. That results in ongoing volatile currency rates. Furthermore, the countries of the Eurozone face on -- an elevated level of inflation. Per end of July '23, inflation in the Eurozone came in at 5.3%, a little bit less than the months before, but still on a higher level end -- on a higher level than expected per end of last year or beginning that year. Nonetheless, we were able to react into this challenging market environment. We were able and we are able to further increase our CM2 margin now to 16.9%, and which is at our target level of around 17% and a remarkable achievement despite rising interest rates. Additionally, the rise of our CM2 in the most recent quarters also emerges in our P&L, in our P&L of '23, with an operating income growth of 11.4%, and this even includes the rising cost of funding. The ifo Business Climate Index fell to 88.5 points in June from 91.5 points in May, which is mainly due to the manufacturing sector. But we achieved, again, a double-digit growth in that quarter of roughly 11% in leasing new business, that's strong and outstanding.
Also, looming nervousness of an [indiscernible] wave is something we do not see happening since the payment behavior of our customers and clients continues to be good and stable, leading to an all-time low loss rate of 0.9%. Let me assure you that we maintain being resilient and cautious about our risk appetite as we have been in the past. A key to our high demand has been and always will be our focus on our customer needs. Introducing green economy objects such as e-bikes has proven highly successful for us. We do observe an unbroken trend towards a green economy transition which is backed by the number of e-bike contracts settled in Q2, an impressive growth of 50% quarter-over-quarter supports this observation. Now let's take a look at the development or a few to our portfolio by objects and here listed by the number of contracts and not by volume, so by the number of leasing contracts. And also on that portfolio, you can see on the third bar group the number of e-bikes is increasing and also the portion of our portfolio in e-bikes is increasing. And this business is offered in Germany, Austria, Belgium and Finland for today. IT equipment in terms of relation to the other object is a bit low, but it's always a strong demand on that because digitalization, another most -- a very important trend in the small medium enterprise sector is ongoing and we see further investments there. Our diverse leasing portfolios and that diverse business approach is a base for our further growth. And it's a sustainable way to prepare leasing as a solution for small medium enterprises to realize important investments for digitalization or the green transformation. Lastly, we do not see a big change regarding the ticket size. So the average ticket size is mere close to our to EUR 8,000 to EUR 9,000 as it was in the past, quite stable. And also the average duration was roughly 4 years of a leasing contract, means the average lease term of a leasing contract is very stable over the last quarters and years. So ladies and gentlemen, what you can see on this slide is how we build up our leasing receivables, on the one hand, in the green line and how we build up our interest income in the blue bars, and both is very important. First, the leasing receivables increased because of the strong growth over the last quarters. So the portfolio build up, and that is the base for our earnings to date and also for the future earnings, especially for the interest income. And this positive development in volume is also shown in the positive development of interest earnings. It went also up and you see compared the blue bars, especially per end of June and end of March this year that the growth was a bit faster than the volume growth. And that depends on our leasing conditions. It depends on increasing leasing conditions, and that has proven that we are able to passing through higher funding costs into our leasing portfolio into our new business as we've shown in our CM2 calculation. And now we see that here on our interest earnings and that position will continue to grow in line with our new leasing business and business we set for '23 and '24. So let's now take a closer look and maybe it was a bridge from interest income or interest earnings and leasing receivables into the financials. So here, it's a bit a long-term view to our portfolio. Here, we've shown on the green line, the CM1 margin, CM1 we call that is the impression for our, let's say, net interest income of new business. We're calculating and looking forward the 48 months in average. And the blue line is the key interest rate of ECB. And since mid of '22, we see and saw a huge increasing of interest rates that's shown here. On the other hand, we see in the green line and the gray in the box that our CM1 margin looking to a long-term view is very stable on a level a bit more than 10%. And the dip in the last year was because we are calculating our CM1 always with the current interest environment, so with rising interest rates on a daily basis. And it needs roughly a quarter, as we always mentioned, to passing through higher interest rates means when interest rates at the market change and into our leasing conditions into the market. And what we see here is that CM1 is stable and a bit rising over the first and second quarter in '23. And to remind us the CM1 is calculated as a net present value of the leasing installments, which are settled in the leasing contract. The discount rate is our expected funding cost of today means for each sale contract today, we are taking the today's interest environment, calculating our expected funding cost for the next 4 years in average. And that is the base for the net present value and then we have to take in account what is the investment we have to pay for the leasing object. And overall, that gives us the net interest margin of a total period of time. So in that CM1, the increasing interest environment is fully involved. And to go a bit closer to the current environment and to the previous quarters, that's shown here the development of CM1 margin on the one hand, and the strong increase of interest rates. And we see here that interest rates based on ECB, but it's nearly the same when you look to the money market and also capital market interest rates and our duration area of 2 to 3 years, it increased by 400 basis points. And to come back to our calculation of CM1 to make it a bit easy to have an increased interest environment of 400 basis points. That means that we have to pay an average duration capital weighted average for 2 years, 400 basis points more than in the last year or the beginning of the last year for our funding. And that means 400 basis points multiplied by 2 because of the duration. So that means 800 basis points in Contribution Margin 1. So without any changes in conditions, without any changes in our leasing installment and our leasing approach at the market, the CM1 would be down by 800 basis points. And that should show you again that within that increase of 400 basis points of ECB interest rates, that development of Contribution Margin 1 as well as the development of Contribution Margin 1 is the success and well-done performance by our sales forces. And the CM1 as a base, let's say, the bottom of our CM2 because in addition to CM1, we have to add expected loss, we have to add the service business expectation, and we have to add the expectation of aftersales because we are owner of the uptake and maybe we can sell it, maybe go for prolongation or something like that, and that results in a CM2 level, which is from a midterm view backwards more or less stable, and we are now very close to our 17% goal. And again, within a very challenging interest environment, means, on the one hand, the first exercise is to increase leasing conditions to have a stable margin to increase margin after the 15.5% in Q4 last year. And at the same time, we would like to achieve, and we achieved double-digit growth. So both is challenging in that environment, achieving a double-digit growth in volume and at the same time, having a CM2 level on roughly 17%. And now we jumping a bit in our P&L or not a bit, we are jumping in the P&L because we are talking about CM1 development, interest rates increasing. The CM1 and CM2 is very close to our goal target. The CM1 shown us that we are able to passing through higher interest rates, as I described before. And what does that mean for our P&L. So when you look to the P&L you have to take in account the interest income, but to split it into both parameters, the interest earnings or income on the one hand, and that's a net income. That is in our business, the interest earning of the leasing business, a bit of factoring business and the banking businesses. They are also a part of the game, but the most important part is the interest income of leasing. That's shown in the CM1. And the expenses from interest rates we have to pay for our funding. And here in the blue bars, we show the absolute numbers of the interest income of our IFRS P&L of the group. And for Q4 '22 and for Q1 and Q2 '23, the dark blue bar, that is the difference between the previous quarter. So that this quarter-over-quarter means Q4 '22 compared to Q4 '21, Q1 '23 that is taken in the chart I see. So that should be Q1 '23 with the second bar was the dark blue portion on the top compared to Q2 '21 -- sorry, Q1 '22 and so on.
And to compare now the last bar group, that means that we have more interest income of EUR 10.2 million compared to Q2 of the last year. And let's say, [indiscernible] is what happened in the interest expense. And the interest expense went up by EUR 13.6 million. So there is a gap between the income increase and the expense increase of EUR 3.4 million. It's important to look to the absolute numbers because when you calculate in rates, in growth rates, the interest expense growth is amazing compared to the growth of interest income. But our goal is to cover the absolute number means EUR 13.6 million expense into our interest income. And that results, at the end of the day for that quarter in, let's say, a compensation rate by 75%. On the right-hand side, you see that only for that quarter. And so the rest quarters it to go is the EUR 3.4 million. And we did a great job over the last couple of quarters and months to passing through the mostly part of higher interest expenses. And we see that for that year on the next slide a bit more in detail. And as I mentioned before, we calculated something like a compensation rate. And in Q2, that compensation rate that is the relation between the absolute numbers of growth in interest income divided through the absolute number in the growth of interest expenses is 75%. And that's a great result. And over the next coming quarters, that compensation rate should be increased as long as we will not see further hard increased interest rates based on the capital market or ECB. And in the last quarter, it was only 64% and over year-over-year per end of June, we're talking about 70%. And again, it's important to look to that compensation like this, like we did and not only looking to the growth rates in the P&L numbers because of the very low interest rate in capital market interest, it was close to 0 growth rates are not that as a good adviser as it may in other figures is take care and take the absolute numbers and calculate it like this, when you would like to go for how many of the raising interest expenses, we are able to pass it through our customers. That's a technical view to our P&L on the Q2 base. You know that. And we've shown that in a bit different way as you're able to see in our published report on the table, most important, of course, is net interest income. It decreased interest income was increasing. We saw that before the interest expense with a higher increase compensation rate of roughly 70%, 75% for that quarter. That's why the interest income, the net interest income is slightly decreasing with the strong loss rate and the strong performance and risk provisioning and the loss rate of only 0.9%. The net interest income overall means after risk provision and settlement of GRENKE came in with the plus. And overall, the operating income was 11% plus is a very good result. The overall result is EUR 24.5 million, which is good compared to the Q2 last year. Also very good compared to the Q1 that year. So we are on a very good track and very happy with that result. A bit closer, a deep dive to the cost/income ratio. We are all aware of that. And the cost/income ratio went up to 59.5%. And looking to cost and cost performance, we are not happy with that result, but there are several reasons for that increase. And on the one hand, I will say that quite clear, we are on the way to manage our costs quite strictly looking forward to becoming the -- a better performance in cost management on the one hand and also as a result in the cost/income ratio. And of course, cost/income ratio increased because the cost for staff costs increased, especially when we compare Q2 '23 to Q2 '22, the change in our total reward system was not implemented fully per end of June last year. It's now fully implemented towards like a base impact to compare that. So that's why it's more important to compare Q1 to Q2. And there, our costs overall are in a good line and in line with our expectations and planning. And we have also to take in account it's a cost/income ratio. So not only costs are reflected by that, also the income is quite important in that development. And we talked about rising interest expenses and the compensation rate of 75%. So it means, on the other hand, the 25%, which is outstanding, is also part of that cost/income ratio because of that, the income is less. And so the cost/income ratio went up. For the future quarters, we expect that, that compensation rate will become closer to the 100% because we are able to do that. And if there are no further changes in interest environment, and we will see the curve of that rising income and in relation to the cost and also the cost/income ratio will be better. And may you ask here, why is the cost income ratio 59.5%? The development of earnings is quite good. So profit at the end of the day, it's a quite good development. That's for sure. We are not including, as all of you do from my experience we are not including the settlement of claims and risk provisioning. So the cost/income ratio, means the income is without the settlement of claims and risk provisioning and in the comparison to the last quarters and especially through the last year, that development is part of our P&L, but it's not part of the cost/income ratio, and that's why the has -- may look into the figures a bit of mismatch. Earnings on the one hand are good. And of course, risk provisioning, settlement of claims are also linked to interest income as we always mentioned, but in the cost to income ratio. It's not part of the figure. And so we are looking to our risk provisioning and on the balance sheet perspective, you know the chart and in the second quarter '23, we saw continued strong payment behavior of our customers, as I mentioned at the beginning. That resulted in a further improved loss rate of 0.9%, which is significantly below our long-term average. It's roughly 1.5%. Accordingly, we could adjust our risk provisions in the P&L. We are well in line with our full year target of less than 1.5%. And 2 things are important, looking and interpreting the loss rate despite the strong payment behavior of our clients. First, we have a leasing portfolio, which is well performing. And during the pandemic, risk provisioning was strongly increased. So today, we could release risk provisioning from that time. And second, the strong portfolio volume of 2018 and 2019 is also running off. And this strong portfolio volume was part of the first thing I mentioned. So in addition to that, after that volume impact brings us also less risk provisioning. Let's go to our cash flow statement and well-known cash flow chart. On that side, we see that we increased our cash by some EUR 165 million in the first quarter. The increase was based on the strong payment behavior of our less is because in payments we got was very strong. In addition, also the refinancing portion is very important. Overall, we are very satisfied with the cash flow development. We were able to cover our funding needs over the whole quarter and for the quarters to come to achieving our new business targets for that year. And also within the funding, that cash flow is very good and results in a cash and equivalent position of more than EUR 600 million and that's well coverage for the next investments in leasing business, which is still ahead of us. And that brings me to the funding mix per end of June. We see here the overall funding mix includes the debt financing on the one hand and also the equity. The equity ratio was roughly 20%. And the other ones, asset baked, 17%. GRENKE Bank business, roughly 1/4 of our funding with an increasing deposit business, which was very important for us in that environment. On the one hand, it's a good way to excess liquidity on the one hand. On the other hand, that funding is compared to the capital market funding quite cheaper. So that's the well performance of GRENKE Bank to providing as a group here with GRENKE Bank funding. And that's why that is also rising and the senior unsecured funding includes, on the one hand, the capital market instruments from our debt issuance program. but also promissory notes, and also our syndicated loan, RCFs and so on are part of that with roughly 40%. And showing us again that a diverse funding portfolio is not only helpful. It's quite a good and was a good strategy to have several fundings in the box to being a player in each box at each time that was always our goal to do so, and that is the goal for the future. And so we are happy with that funding mix on the one hand, and that provides us the future growth.
Yes. That brings me to our key takeaways for today. On the one hand, we strengthened our profitable growth path so we are well on track. We are almost back on the 2019 level roughly. So now it's a new level of growth we would like to achieve, especially with the next year within the EUR 3 billion range in volume, and we will take care for the right balance between risk adjustment, contribution margins and volume.
Also, we gained further market share. So our growth pace is higher than the market, and it was higher than the market. So we are able to winning market shares across the landscape, and that's also the goal for that year and for the years to come. And we are also able to driving the market in growth to getting new objects in -- or bringing new objects into leasing solutions as we did as one of the players for the e-bike business. And we are focused on increasing our efficiency on the one hand, with our digital excellence. We announced at the beginning of that here. We are also well on track with that and the digital excellence will help us in accessing the market and our market growth and also internally within the processes. And we will also take care for a strict cost management over the next couple of quarters.
So thank you very much, ladies and gentlemen. And now I'm ready for your questions.
Yes. Thank you, Dr. Hirsch, for your presentation. [Operator Instructions] The first question is from the line of Marius Fuhrberg with Warburg Research.
A couple of questions from my side, please. The first one, quite is maybe on the compensation rate you mentioned. You're now at 75%. When do you expect to hit the 100%. So in other words, when should we the interest income growing faster again than interest expenses? And then second question is on your adjusted 2024 outlook, obviously. So from my perspective, I mean, the volume effect we already have from the inflation, meaning from higher object prices and also banks being a little bit more restrictive in the lending should rather boost your -- or boost demand for your solution. So could you give us a little bit more color on how you think of that? And is it basically a lower number of or a relatively lower number of contracts you want to sign in 2024? And maybe also, could you give us a little bit more color on why you explicitly choose now as we are in August 2023, so there is still some time until 2024. But why do you chose at this point in time to look at your 2024 outlook and adjust that accordingly?
Yes. thank you for your question. I'll start with the first one, Mr. Fuhrberg, first, the time when the growth of interest income and interest expense should be leveled at the same level, so the compensation rate would be minimum 100%. I think I guess it will be middle of next year, but it depends on the interest environment. Because as the last steps we have to go and we had a small CM2 in Q4 last year, the 15.5%, and that will be part of our P&L in the duration over 2 years, and that's why I expect to 100%, we will see mid of next year, I guess, but we will see a movement over that year closer to 100%. So second question, on the one hand, the time of getting information, the time of reflecting information and may adjusting numbers, as we did yesterday, it's a bit not part of the things I can do. So we reflected during the whole year, our guidance, as we always did and always do. And because of the overall environment and especially after the third time of ifo Climate Index and also listening to the main markets we have. The question was, is that increasing of volume and let's go from the midterm guidance that year, EUR 2.7 billion to EUR 3.4 billion, is that achievable in that macroeconomic environment? And which is, let's say, the risk appetite, we have to go forward within that. And the volume number that's more than our biggest country we have today in addition. So the gap of EUR 700 million is more than in the today numbers our biggest caveat first. The second one, we are very happy with our CM2 development at the moment. So we are very close to the 17%. That was a challenge. We did a good job, I think, in achieving that goal. And we are not willing to give up that 17% CM2 margin and that might be necessary to achieve that huge growth. And that's why we decided, okay, double-digit growth on that level to go for more than EUR 3 billion, that is the right way. And overall, we see the room for double-digit growth because the things you described, other leasing objects came in the investment, realizing why loans is not that easy at the moment. That's our room and our space for growth for sure. but to going for growth, more than 20% in that environment is not further the plant taking care for the margin with a bit lower volume. That's the way we would like to go and I believe that is the right way.
The next question is from the line of Johannes Thormann from HSBC, please.
Three questions on my side, please. First of all, your risk cost guidance of 150 basis points this year. With Q2 level of 90 bps, how -- what is a realistic level for this year in your view to be a bit more precise and far below 150 for this year and probably also for next year, you have a decent look in your portfolio quality?
Secondly, just on the tax rate, we had the increase after super ammortamento going away. Now levels are again low in this year. What is a realistic run rate for this year and next year? And last but not least, talking about next year and your cutting guidance, you develop quite a track record for cutting guidance. So this is not the first time we've seen a decline in '24 guidance. You already cut it for the investments. And then how confident can we be and how certain can we be this is the right guidance for '24? Or should we rather expect another nasty surprise in the due of the next quarters?
Yes. Thank you, Mr. Thormann. First, in terms of risk provisioning and risk level, I think it will be fair for that year to go in the range of 1% to 1.25%. That could be fair looking to today's numbers, and there's only a half year running. And also looking to our portfolio quality to the next year I think in the area of 1.2%, 1.25%. That could -- it could be fair, maybe there was a bit room up and down, it could always be the case because we have to take care for macroeconomic parameters and our expected credit loss model under IFRS 9. you know that the forecast is at the end of the day, not that easy. But looking into our figures and to our model, I think in the area of 1.25% that could and should be fair. The tax rate with the area of 25%, a bit less than 25% is also fair. You asked why, you're right super ammortamento is also a driver in the past, there also the portfolio of the Italian business was very, very strong. So roughly 20% to 25% of the new business in some quarters was in the Italian one. The portfolio and the new business in Italy is now lower. Of course, Italy is one of the third biggest companies, but it's lower than in Germany and in France. So the, let's say, common tax rate in Italy is also higher and super ammortamento is done. And that's why also our tax rate came a bit down over the last quarters because the portion of the Italian business is not that high. than it was in the past without super-ammortamento. And so I think 25% a bit less is also fair to go in for that. And the other thing is there, I got that point and I can say that we are more than confident with the guidance, of course. In the beginning of the year, we announced digital excellence. We would like to be fair and transparent and to give you the information as soon as possible. During that year, the environment changed. The outlook changed, and it is like it is and that's why we decided now to do that, giving you the clear view of the Board as soon as possible and directly and not waiting and hoping for [indiscernible] and that's the way we did. And for that, we can say it was the right one. I know and absolutely got your point. But that's, let's say, is a clean guidance for next year within the digital excellence programs, the investments and within outlook of more than EUR 3 billion. And I think in the overall view, it's a quite good outlook for GRENKE.
First of all. We have a question now received from our participants in the webcast, and I will read that to you. So it's from Mr. [indiscernible] and it's about the loss rate again. So looking backward, you have been too conservative with taking risk as is evident by a loss ratio of only 1%. So why does it not make sense to be a little less conservative looking forward for new leasing business?
Yes. Thanks for the question. And it's the question we discussed also in our departments with our sales guys also and the Board because it's, let's say, the first few looking to the days of May, we were too conservative in the past. And we had a situation like this some years ago. But the time is a bit different because of the portfolio impact I tried to described. We had a strong portfolio 2018, 2019, and that portfolio came down. And because of the expected credit loss under IFRS 9, when that portfolio is performing and running down, you will release risk provisioning, and that brings your loss rate today down. Because in 2020, '21 and also '22, the new business was lower than the 2019 and also the 2018 business. And so there is also a volume impact inside. In our loss expectation means the expected credit loss today, we are calculating 5% to 5.5%. It was also the case in the last year. That means over the whole term of a leasing contract, we are calculating an expected credit loss of 5% to 5.5%. In 2019, it was roughly 6%, a bit more than 6%. So of course, there was a risk appetite a bit higher. The environment was also a bit different. And again, Italy. The portfolio of the Italian business was a bit higher. And in the Italian portfolio, the loss rate is closer to 7.5%. In Germany, we are closer to 3.5%, something like that. And because of that difference in rate is a new business and in our portfolio today, our loss rate is a bit lower because the portion of the Italian portfolio is lower. But again, the CM2 and the profit/loss rate of the Italian business was very good over the past and also today, but the volume meets the portion of the overall business is lower. And that's why I said to Mr. Thormann before, the 1.25% is from today's few may more or less fair looking forward over 4 years, that brings you roughly to the 5%, 5.25%. And with that level, we feel very confident in today's environment going forward. It could be a bit more, but not that significant that we are widening our risk appetite.
Yes. So we have another question from Mr. [indiscernible], and he has a follow-up on the question of Mr. Fuhrberg, which was targeting the CM2 margin. So now it comes to the question. Focusing on 17% CM2 makes sense. But given the current loss ratio of only 1%, it seems you're taking too little risk given the fact that banks are quite under pressure and you could gain more share by growing faster than guided.
Again, I absolutely got your point, but again in our expected loss calculation, we're talking about 5% to 5.5% as part of our CM2. And we think that, that is a good level. We're always checking the level of risk we would like to take we are able to take the right price sensitivity in the market to passing through on the one hand, higher interest rates and also higher risk cost because it's not only taking tomorrow maybe 7% expected loss, then we have to increase for that in risk-adjusted pricing also the conditions and to leveraging that in that environment and it's not that easy. We are very confident versus today's level, and we're always checking that may, if we see a bit better cyclic in the macroeconomic, then it could be that we're going faster in taking more risk. For the moment, we are feeling confident with the double-digit growth.
So there are no further questions at this time. [Operator Instructions] So we have another question now coming in, and it's from the line of Dr. Häßler from Pareto Securities.
Yes. Philipp Häßler from Pareto. I have also one question regarding the 2024 guidance. The net income range is relatively wide, I think, EUR 95 million to EUR 115 million. Maybe you could elaborate a little bit what could be the reasons for reaching only the lower end of the range and the higher end of the range? To what extent inflation plays a role? We just learned that risk provisions should remain on a low level. Net interest income should continue to grow. So am I right in assuming that the cost development will play an important role?
Yes. Thanks for the question. On the one hand, let's say, upper end of the guidance in -- for the P&L in '24 is calculated by the upper end of new business guidance, '23 and '24 because our portfolio of today, our new business of '23 and the new business of '24 will drive our P&L. And the low end of the guidance is calculated with the lower end of the new business guidance. That means on the one hand, EUR 2.6 billion for that year and EUR 3.0 billion for next year. And it also reflects, on the one hand, a bit higher loss rate, but not significantly, but it reflects a bit higher loss rate because that is important. And it gives us also, let's say, some leeway in terms of may next or may a surprising interest decision of ECB because we don't know what will happen. And we know, as we've shown in the past, as we've shown in the current quarter, there is a time lag in our business to passing through higher interest rates. And whenever interest rates will increase further, maybe for end of the year, May was beginning next year, then we will see on a high volume because of the growing that time lag again. And we will see that also in our CM2 on the one hand, but then also in our P&L. And that means the compensation rate will be longer on a lower level than 100 because of interest rates rising, we don't see today, but it could be and that leeway is part of the EUR 95 million at the end and that gives us confidence to go in the next year from today's point of view.
So cost inflation shouldn't play a major role because in Q2, we have seen a quarter-on-quarter cost increased by EUR 6 million. So you should -- you expect this to run out in the next quarter, the high-cost increase year-on-year?
Yes, of course, that we see, of course, inflation is always a part and that we have to reflect also in our cost development, but we will not see huge cost development, and that guidance is not driven by further cost increases, it's more driven by the operating income development.
So ladies and gentlemen, there are no further questions at this time. But there's another one from Johannes Thormann from HSBC.
Yes. One follow-up regarding the new business this year. You're guiding for EUR 2.6 billion to EUR 2.8 billion. Do -- should we still expect the usual seasonal decline in Q3 due to summer months? Or will this year probably also be shift in product mix towards e-bikes and so on be a more linear development that Q2 is above Q1 and Q3 will be above Q2? What are you seeing in July so far?
In terms of, let's say, months and quarters, it's -- it looks like a normal year, yes. Of course, during the summer, the e-bike business is still going and still running. But because of the vacation time, especially in Southern Europe, but also in Germany, you will see in, let's say, more or less normal summer break. So that your assumption is quite fair that we will not see in Q3 the figures of Q2 will be a bit less from my expectation and Q4 should be strong and normally the strongest quarter of the year from our today's knowledge, yes.
Okay. We have another question from the webcast and it's about the -- our emerging markets, our future core markets. And the question is circling around our future development and how it is going in our future markets. And when can we expect them to come closer to the volume you have in countries like Italy?
Yes, it's a first, always a question of time because we are growing and developing the market step-by-step as we always did. And in all future core markets. And as in all other markets before, we need the first 10 years to being that significant in volume as may U.K. is in at the moment. So the first line to take is EUR 100 million. range. And in the EUR 100 million range, we expect, let's say, Australia and Canada may for the next 5 years. And in the U.S. market, it's quite too early to see the EUR 100 million range because it's always a time of EUR 10 million or the EUR 20 million. You have to get a check as a market to check what's the next expansion level going, price [indiscernible] going in the next day or something like that. So it will be -- take a bit more time because of the increased volume in all the other regions. And the future core markets will be important of new business over the next year is not that relevant as may expected.
But again, Australia and Canada are well on track to becoming that important here is Q4 over Q2 result for Canada. For example, you see the volume and also Australia there. And we're having doubled -- roughly close to a double-digit million means we are very close to EUR 10 million per quarter. That means the next double the EUR 50 million and then the EUR 100 million, but it will take time. It's Slide 28, I got that from [indiscernible]. Thank you very much, of the presentation there, you can see a bit more detail.
So there are no further questions. Also, I checked the webcast. So this seems to be the case. Everything seems to be answered. So thank you very much for your presentation, Dr. Hirsch, again. And ladies and gentlemen, this concludes our call today. I would like to remind you of our new business results for Q3, which will be released on October 5. You may disconnect now. Thank you again for joining, and have a pleasant day. Goodbye.
Thank you. Bye-bye.