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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to everybody on this call on the 2021 first quarter results of the ProCredit Group. My name is Gabriel Schor. I'm a member of the ProCredit Holding Management Board. As usual, I'm joined by Christian Dagrosa, who will take you through the financial sections of this presentation. We plan some 40 minutes to cover today's presentation, which has been available since early today on our web page. As usual, we will give sufficient time for any questions you may have. Let me also provide you with the usual warning to pay particular attention to the cautionary statements regarding forward-looking comments that you will find at the end of the results presentation. We have the usual structure for today's call, more or less. Firstly, I will take you through the section covering the highlights of this first quarter. This will inevitably focus on how the coronavirus pandemic is influencing the environment in which we work, and thereby group performance and outlook. Christian will then take you through the details on financial results, asset quality as well as development in the group balance sheet and capital. If we turn to Slide 2, this is a summary of where the ProCredit Group stands in the current market context. Clearly, our countries of operation are undergoing considerable social and economic disruptions in adapting to the pandemic and the lockdown measures which were introduced in early March in all our countries of operation. Nevertheless, as we highlighted in our last call and as articulated in the management statement we recently published on our web page, generally we are approaching this year with a relative degree of confidence. Our business model is focused and robust. And our experienced staff and clients, they feel well prepared for it. And we are further reassured by our steady first quarter results, so let me start with these results. Despite the market disruptions, we achieved a steady growth in our customer loan portfolio of just under 1%. Although we also experienced negative currency impacts in our Eastern European region, our deposit base was broadly stable, declining only a little due to seasonality and currency effects. Generally, we believe that our steady business and operational performance reflect the strengths of the twin pillars of our business strategy: the highly personalized Hausbank for SME, combined with the high-quality direct bank. We also achieved solid financial results. Our profits for the period was EUR 13.7 million, representing an annualized return on equity of 7%. As such, our profit is up EUR 3 million or roughly 30% compared to Q1 2019 due to a 12% increase in net interest income a stable cost base and the absence of any significant one-off effects that had impacted previous year's results. The improved operational profitability is underpinned by a reduction of the cost-income ratio of more than 5 percentage points. The annualized cost of risk of 5 -- 57 basis points is naturally significantly higher than in previous years. This is driven largely by the impact of more negative macroeconomic forecast on our provisioning model and is in line with the expectation we articulated in our last call. Christian will cover the financial results in detail, but suffice is to say that the solid business platform we have built over the years is generating the underlying profitability, which helped us to carry the high credit costs which we have to expect this year. Credit risk is clearly the foremost topic, and we cover this in detail today. Overall, our credit risk profile is developing in line with expectations in the light of the COVID-19. Loan portfolio quality remains good, with credit impaired loans standing at 2.4%, 10 basis points below the year-end figure. At the same time, the coverage ratio improved to 95.5%, remembering that we have good collateral, and then 14% of the portfolio is covered by cash and financial guarantees of international financial institutions. Most of our clients are well-established SME who meet our selection criteria and have certain management experience and financial reserve to respond to difficult times. We do not have exposure to high-exposed sectors such as hotel, travel or transport. More importantly, unlike other banks we do not have a meaningful consumer loan portfolio which we believe will be more strongly affected, particularly in 2021 when moratoria on rents runs out. In turn, we have relatively high exposure to more robust sector like agriculture, essential retail and green loans especially. We are going into this period on the back of a long track record of very good loan portfolio quality with highly experienced staff. Overall, we have a proven approach to managing credit risk based on individual client relations, which means for example a case-by-case review of moratoria applications, a differentiated approach to restructuring, and minimizing level of clients' default. We will cover this in more detail later. Liquidity risk in emerging markets is naturally also an area of potential concern. Overall, though, our deposit base has been very stable. We believe this reflects our reputation in the market, good client relations, and good direct bank platform. At the end of the quarter, the group LCR stands at 181% and the deposits-to-loan ratio at 88%. We view this as a comfortable liquidity position and see a relatively steady outlook based on our steady deposits -- sorry, stable deposits, good source of long-term IFI funding and manageable levels of our portfolio in moratoria. At the end of Q1, our CET1 ratio stood at 14%, and our leverage ratio at very comfortable 10.5%. In this context, it's notable that the Fitch rating of both ProCredit Holding and most individual or credit banks were affirmed in April along with a stable outlook. Clearly, many people are wondering how banks in the current environment maintain relatively normal business operation.On the one hand, whilst managing credit risks, we have a focused and impact oriented business model, which is designed to support clients through turbulent times. ProCredit banks were founded in order to foster the sustainable development of small and medium enterprises in order to help create just some prosperity. Central to our mission is helping businesses to grow in good time and to protect clients from default in more difficult times. To this end, we have implemented our Hausbank for SME concept, which relies on very close client relationships and well-trained staff. In contrast to most other banks, we do not have a mass scale retail business model. 93% of our loan portfolio is to SME and 6% to long-term housing loans to individuals. We select and work with our long clients very carefully. It is this approach that helped us maintain high loan portfolio quality over the years and over the cycle while achieving steady growth. The level of credit impaired loans for credit banks is consistently better than the market in which we operate. Complementary to our Hausbank for SME approach has been the successful implementation of our ProCredit direct bank approach to private client and digital banking in general. With ProCredit Direct, we have a well-established, proven digital platform for all routine transactions. All our clients are already fully onboarded. This means no over-the-counter transactions and no busy branches. Over the year, we have completely modernized our banking platform and strongly reduced the number of branches and staff. This is a challenge many banks in our market still have ahead of them. In comparison to others, we have had very little problems in adapting to the lockdown measures.In summary, we believe that the value of ProCredit's steady service quality becomes even more evident in the current environment. Since many banks are not actively lending at the moment and need to adapt the operation to social distance requirement, we believe that we can even reinform targeted customer acquisition efforts and can continue to expand in less impacted sectors, like agriculture and renewable energy. Let me now cover some of those aspect to say a little more detail. Slide 3 provides an overview of the current market environment in our countries of operation. Generally, governments have been relatively consequent in reacting promptly and firmly to the pandemic. State of emergency and lockdown mergers were imposed in most countries in early March in order to protect generally weak health systems. As a result, inflection and death rates are currently significantly lower than in Western Europe. Generally, the measures have been supported by the populations. In most countries, measures are planned to be relaxed at the end of May and/or over the month of June. Fiscal and monitoring measures are in place to support potentially impacted businesses and households, although they are at a smaller scale than in Eastern and Western Europe. Central bank have imposed or recommended, strongly recommended moratoria in all countries, typically between 3 and 6 months. Most schemes are opt-in schemes, that is, a moratorium is granted if requested by a client and only then. Only Serbia has an opt-out scheme that these loans have to be granted a moratorium unless a client requests not to have one. Central bank have also eased liquidity and capital requirements and discouraged the disbursement of dividends. The macroeconomic impact of all that still remains difficult to assess. So much depends on how quickly market confidence returns and lockdown measures are relaxed. Generally, it is assumed our countries will experience a sharp GDP decline this year, but customer confidence and buying power will return quite promptly to drive strong economic growth in 2021. The GDP forecast figure you -- which we provide in this slide are from the IMF World Economic Outlook from April. These are figures we have in mind when looking forward.On Slide 4, we see a summary of the mergers we have taken to smooth business operation in the context of the very strict lockdown and social distancing arrangement. I will not dwell on each point of it. I only wanted to highlight that we were able to put appropriate measure in place with relatively little disruption, either to front office and client-facing operation or to back office and operational workflow. Only 12 out of 82 service points were temporarily closed. But all branches, self-service zones and ATMs remained operational at all time. We strengthened call centers facilities to support client communication. This has been largely a function of already well-established digital infrastructure and the strong and continued support of our IT subsidiary people. It was relatively straightforward to move most staff to home office arrangement. About 66% of bank employees are working remotely. We have, of course, also restricted international travel, but group communication is working well with regular virtual meetings. Generally, the attitude among staff is positive and focused. We have in the group a can-do culture and have been able to focus strongly on client communication over the past weeks.On Slide 5, you can see the growth in our customer loan portfolio. This shows continued steady development in business operation. We grew by EUR 42 million in the first quarter, despite the fact that currency effect reduced portfolio volume by EUR 50 million. About 70% of our outstanding loan portfolio volume is which client with an exposure of over EUR 250,000. This is also where our growth is focused. These are well-established clients that meet our selection criteria for good management and sustainable forward-looking business models. These businesses typically have certain reserve and a firm capacity to respond even to strong macroeconomic turmoil. Thus, we have relatively limited number of businesses, with whom we will work closely in coming months as they adjust to the prevailing conditions. Despite of the COVID-19 situation and general stagnation in investments in late Q1, it was encouraging to see that the green loan portfolio continues to grow even faster than the portfolio as a whole. Some 30% of the total growth come from green loans. Short and long term, our green loan portfolio remains important. The green loan portfolio enjoys very high portfolio quality and is likely to be relatively more robust in this crisis. The default rate of the green loan portfolio is only 0.6%, which is 1.8 percentage points lower than for total loan portfolio. Strategically, we also see strong growth opportunities here, particularly in renewable energy projects. A major theme emerging from this crisis will still be the future -- future-proofing industrial development to be more climate-friendly. We are well positioned to support those developments in this direction, and we have created significant staff capacity for project finance in the last 2 years.Turning to Slide 6. You see that we achieved strong growth in deposits in 2019. The deposits volume has been relatively stable in Q1 2020. Year-on-year deposit volume increased by EUR 490 million or 13%. in the first quarter of this year, there was a decline of only EUR 74 million, driven by seasonality and currency effects. Year-on-year growth was achieved in both business and private client deposits. Liquidity will be important this year from a risk and from a business perspective. Our ProCredit digital approach has been a great strength in past weeks. Most other banks in our market are still heavily brand-based and have struggled to put in place operation which limits the physical contact between clients and bank staff, whereas basically all our clients are using the Internet and cards for their transactions. The digital approach has always meant efficiency and scalability to us. Right now, it also means stability and safety. Clients can bank safely from home, and inquiries are dealt with by our contact center. Our good staff have been central to the saving in account turnover from private and business clients. In looking forward to 2020, this means we have good relations with our clients and good visibility of the client businesses as a whole. This individual client knowledge and having staff that can find specific and intelligent solutions for individual client will be invaluable in the current market context. Our liquidity position is further supported by funding from international financial institutions. Slide 7 provides an update on credit risk measures and trend in the context of the COVID-19 pandemic. Christian will cover asset quality in more detail later. I wanted to highlight that our basic approach to credit risk is to assess and work with the situation of each individual client. ProCredit bank staff have been in touch with each of their business loan clients in the past few weeks. In difficult times, the management skills of a client and understanding the particularities of each business are far more important than risk models or scores. At this stage, we do not observe a meaningful deterioration of loan portfolio quality. We have had a slight uptick in Stage 2 loans as clients already experiencing difficulties were further affected by the current conditions. The main driver of the increase in Q1 credit risk costs was the negative macroeconomic outlook, driving additional portfolio provisions. In order to better understand potential credit risk costs this year, we are not just looking at our assessment of the individual client, but also look at indicators such as moratoria and sector risk assessment. As I mentioned, moratoria are a feature of all markets in which we work now. All countries, except Serbia, have an opt-in approach. About 30% of the loan portfolio is under moratorium. If you exclude Serbia, which has a rather distorting effect by the way because it was mandatory, it has a distorting effect of the group picture. If you exclude Serbia, the portfolio under moratoria stand at EUR 800 million or 20% of the portfolio. All applications for moratoria were received by our business client adviser and credit risk specialists to determine whether there was already evidence of the need for restructuring. This has been rarely the case. We anticipate that if required, restructuring and additional specific provision expenses would rather occur in the second half of this year, and to a limited extent in Q2. The level of moratoria varies by country and sector. As you would expect, hotels, restaurants and catering firms is the sector most affected by the current climate, with 38% of our HORECA, as they are called, now loans under moratorium. However, our exposure to this sector is low, so only EUR 51 million or 1% of total loan portfolio is in this category. We have assessed industry sectors according to their potential vulnerability to measures taken to control pandemic, taking a relatively conservative and rough approach, which includes not only HORECA, entertainment and transport but also construction. About 15% of our business loan portfolio is to potentially more exposed industry sectors. Clients in these categories are the ones will look most closely at. Some 40% of our portfolio, however, is in sectors where we foresee little potential impact such as agriculture, food and dreams, energy, waste management, and health services. Based on our current assessment of the situation of our clients, the overall composition of our portfolio and our understanding of our markets and clients, we continue to expect the cost risk of between 50 and 75 basis points over the year. Slide 8 summarizes where the group stands relative to our 2020 guidance. Even in the current market context, we grew the loan portfolio in Q1. And we continue to see certain potential to grow, particularly in shorter-term working capital funding. There will be some clients that expand on the new market conditions, and we may win certain good clients from other banks. Overall, there has been good business-driven growth so far this year. We achieved 70% -- 7% return on equity in Q1, despite the strong increase in credit risk costs. We continue to anticipate a positive return on equity, although at lower level than in 2019. Our cost of income ratio was good, 64.6%, which shows the improved underlying operational profitability of the group compared to 2019. At 14%, our CET ratio remains comfortably about our guidance to keep our CET1 ratio above 13%. We keep the dividend distribution policy in place. Regarding the profits of 2019, you will be aware that we have delayed the decision of distribution of profit to quarter 4 2020, given the strong recommendation of the EBA and Bafin. Generally, we remain confident in the midterm prospects for our markets and for group performance and explicitly confirm our mid-term targets. And now let me hand over to Christian to cover the financial aspect of the group results in some more detail.
Thank you, Gabriel, and good afternoon to everyone also from my side now. As usual at this stage of the presentation, we will take the next 15-plus-something minutes to look at the group's quarterly financial performance in some more detail. We start by taking a view on those major financial captions and performance indicators that characterize the overall encouraging results of this first quarter 2020. Our net interest income shows a marked increase compared to the previous year, EUR 5.5 million or 12.2% year-on-year driven by the steady portfolio growth of the last 12 months and supported by the continued stability of the net interest margin. Our provisions, as Gabriel already pointed out, increased by EUR 4.8 million, which is above all a reflection of the deterioration of the overall macroeconomic outlook in COVID times. The default portfolio reduced slightly with respect to the year-end 2019, but there was an increase in Stage 2 loans that is also related to the COVID lockdown measures. Net fee income came down some EUR 800,000 compared to the last year, especially as income from private clients reduced. The net result of other operating income improved by EUR 900,000, which among other things is a reflection of the absence of negative one-off effects from restructurings that have affected previous year periods. Operating expenses basically remained stable, increasing only 1.4% year-on-year on the back of higher staff numbers. Having grown strongly in the past 12 months, the stability of the cost base underlines the good potential for scalability of our business model. The net profit of EUR 13.7 million was EUR 3 million or 29% above the previous year and corresponds to an annualized ROE of 7%. The cost-income ratio improved visibly from almost 70% last year to 64.6%. This reflects the strong increase in operating pre-provision income paired with a stable cost base we just touched on. When looking at the operating result of continued operations before taxes and loan loss expenses, you will see a marked increase from EUR 17.8 million in Q1 2019 to EUR 22.9 million in 2020, more than EUR 5 million or 28%, which underpins the much improved operational profitability in this year. We can now move on to the quarter-by-quarter details of the most relevant P&L items, starting with the net interest income. Net interest income remained on the strong level of the previous quarters and came in 12.2% above the previous year figure. Keeping in mind that the net interest income has historically always been somewhat depressed in previous years' first quarters due to the lower number of days, increased concentration of loan repricings, and a characteristic net decline of portfolio in the first 40 to 50 days of the quarter, we are very pleased this year to start this quarter in very positive terms. The steady development is also reflected in the stability of the net interest margin, which has now remained broadly stable at around 3.1% for 5 consecutive years. Provisioning expenses increased visibly compared to the previous quarters, even though portfolio quality developed positively in terms of defaults. As Gabriel already pointed out, these provisions come primarily from an update of credit risk model parameters, an update which was performed to account for the more subdued macroeconomic outlook. This is reflected in an increase in the average expected loss in Stage 1 of around 7 basis points and in Stage 2 of around 16 basis points, which translated into an increase of provisions of around EUR 5 million. In addition to this broader portfolio effect, some EUR 2.5 million of provisioning expenses are related to an increase in Stage 2 loans, which I will touch on later in our update on credit risk. Slide 13 shows the development of net fee income over the last quarters. The Q1 decline reflects primarily the lower number of transactions that is typical for the first quarter of the year when business activity tends to be relatively low. This seasonality effect was in this year further exacerbated by the lockdown measures, which resulted in an overall low level of transactions in March specifically from business clients. Fee income from private individuals, particularly from account maintenance fee, have come down since the first quarter of 2019 due to the more streamlined client base we account for today. The stringent onboarding of our entire client base to online channels, which Gabriel already mentioned, led to a reduction in client numbers, which is by now leveled out. Accordingly, the income from account maintenance fee is now stable with respect to the previous 2 quarters at around EUR 6 million. Slide 14 shows the development of our cost base, which has developed positively with respect to the last 3 quarters and remained broadly on the level of Q1 2019. Be reminded when looking at this graphic, that the spike in Q4 resulted primarily from the negative one-off effects coming from the impairment of fixed assets.With respect to Q1 2019, the increase in personnel expenses was largely offset by lower admin expenses, especially from reduced marketing expenses and lower depreciation costs. The cost-income ratio improved visibly from the average 2019 level of around 70% to 64.6%. This reflects the steady cost base; the strong growth of pre-provision income; and not least, the absence of negative one-off effects and as restructuring measures were concluded in 2019.Looking at the individual geographic segments in Eastern Europe, we have our 7 banks in around the periphery of the EU zone: Albania, Bosnia, Bulgaria, Kosovo, Macedonia, Romania and Serbia. Here, we achieved a solid growth of 1.5% as well as an improved cost-income ratio of 65.7% with respect to 72% for the year 2019. The segment contributed EUR 9.2 million to the consolidated profit. In Eastern Europe, our portfolio declined in euro terms as a strong currency effect negatively impacted the solid business driven growth. The net interest margin shows relative stability at around 4.5%. And with credit risk well under control, this really structurally higher margin supports higher profitability in this segment. The cost-income ratio fell below 40%. The annualized ROE was a strong 15.2%. South America remains our smallest, but at the same time, our fastest-growing segment. In Q1, we continue to see the positive trends we had already highlighted in our last call for our Ecuadorian bank, strong portfolio growth of around 6% and an improved operational profitability highlighted by declining cost-income ratio. The negative result is driven above all by higher loan loss provision expenses resulting from the more subdued macroeconomic outlook in general as well as the country's recent sovereign default in particular. You know by now that our group function comprises the German segment, which includes ProCredit Holding, Quipu, as well as our academy and our bank in Germany. ProCredit Bank Germany continues to play an important role for our group by providing efficient payments, clearing and liquidity support functions. The ProCredit Academy has been temporarily closed down in light of the lockdown measures, and we're already yearning for a time of reopening of this very important institution.Let us move to credit risk. On Slide 17, we see the high level of diversification in our loan portfolio, which you already know by now, both in terms of geographic coverage as well as industry sector. On the left, you see the good geographic diversification, with 4 banks accounting for 10% or more of the loan portfolio. 93% of our loan portfolio is accounted for by business loans, 99% by business and housing loans to private individuals combined. Of our overall loan portfolio, 20% are to agricultural enterprises, which as Gabriel already pointed out, we expect to be particularly robust in this recession. A further 23% is comprised of loans to companies involved in local production, which we believe will play a particularly important role in the economic recovery of our countries post-COVID. Overall, we are encouraged by the fact that these sectors, which are clear drivers for the sustainable development of our local economies, are strongly represented in our portfolio.On Slide 18, we see that loan portfolio quality remains strong in spite of the macroeconomic downturn. The default portfolio reduced by EUR 3 million in absolute terms, bringing the share of defaulted loans down to 2.4%. At the same time, the coverage ratio increased due to the additional portfolio provisions resulting from the update of macroeconomic parameters as mentioned before. Also, we see an increase in the Stage 2 portfolio, which reflects to some extent the first wave of COVID-19 impact, as exposures with preexisting underlying difficulties were actively moved into Stage 2 upon their requests for moratorium. In addition, lockdown measures have in some cases restricted our ability to conduct annual follow-ups on loan clients. It should be noted in this context that to be on the conservative side, our banks usually transfer exposures into Stage 2 when annual monitoring is overdue. Lastly, certain exposures that continue to be affected by the aftermath of the Albanian earthquake in December 2019 have been restructured and consequently transferred into Stage 2. The coverage of credit impaired loans increased, in line with the higher provisions and lower defaults, to 95.5%. As you know by now, this figure does not take into consideration the high collateralization of our loans that I will shortly talk on. Earlier, we touched on the macroeconomic provisions that were added in this quarter, approximately EUR 5 million. Let me add to this point that we do expect additional portfolio-based provisions in Q2 to take account of the most recent macroeconomic projections, which as of now or as of today are more subdued than those that were available in early April when we first adjusted our model. Coming back to the topic of collateral. As you can see, a large part of our collateral consists of mortgages. An additional 14% is accounted for by cash and high-quality financial guarantees, which mainly results from the InnovFin initiative and other guarantee programs provided by the European Investment Fund. In these times, it is worth highlighting once again our strict approach towards collateral. We require high collateral coverage for all medium- and long-term loans, which at around 70% form the larger part of our group portfolio. For the valuation of collateral, we rely on internal specialist staff as well as external expert appraisals as well as regular monitoring. At this point of the presentation, let me conclude by summarizing the simple balance sheet, capital and funding structure of the group and by showing the development of our CET1 ratio in the first quarter. Slide 22 shows our simple and stable asset structure and its development in the first 3 months of the year. Total assets have decreased due to the reduction in excess liquid funds as well as negative FX effects that we already mentioned. On the liabilities side, we see the reduction driven primarily by deposits as well as other more long-term financial liabilities. The reduction in equity is driven primarily by negative FX effects, which are reflected in the decline of the translation reserve of some EUR 22 million. It is further worth noting that by having acquired the remaining minority shares of ProCredit Bank Ukraine in January 2020, there are no more noncontrolling interest in the group's equity. Slide 24, here we see our comfortable liquidity position underpinned by a liquidity coverage ratio of 181%, well above the regulatory requirement of 100%. Highly liquid assets decreased from the seasonally high December level, but show a clear increase in comparison to previous year's first quarters. This underlines how the group's liquidity position has been further strengthened over the years. Slide 25 shows the structure of our comfortable regulatory capital position. Our capital structure remains simple. All tier 1 capital consists of CET1 capital. The risk-weighted asset structure of the group remains simple and standard models are used. Risk-weighted assets are dominated by credit risk. And currency risk is in essence, the local currency equity position of ProCredit Holding. As of March, we had a strong CET1 ratio of 14% and a very comfortable leverage ratio of 10.5%. CET1 capital reduced due to the translation reserve effects that I mentioned before. In our CET1 capital profits as of Q3 2019 are recognized, and we continue to subtract, the anticipated dividend payment in relation to the 2019 consolidated result. Risk-weighted assets decreased due to the equivalence acknowledgment of Serbian banking regulation by the EU Commission, which we had already announced in our previous call. Further, the reduction of excess liquidity and the negative currency effect outweighed the increase in the loan portfolio. Overall, we consider the capital situation to be very comfortable, also in light of the more subdued economic environment that we are bracing for right now. Slide 26 is merely a more detailed illustration of these developments. It is worth noting that the net effect of currency devaluation is slightly exaggerated in this graph, as a decline in translation reserve comes usually hand in hand with a simultaneous FX-driven reduction of risk-weighted assets. These 2 effects, however, do not always fully offset, as part of our local balance sheets are denominated in hard currency. With this, I complete our assessment of our group's performance in the first quarter 2020. And on this note, I would suggest that we move on to questions.
The first question is from Andreas Markou, Berenberg.
Basically, I have one question on what you could potentially do more with regards to cost cutting. You did mention a little bit about reducing, for example, your marketing expenses. What else is there to do to kind of offset the impact of COVID there? And would you be potentially considering any asset sales as well?
I'll take that, Andreas. Thank you for your question. First of all in terms of cost cutting, we actually do believe that COVID will have some inadvertent positive effect on our operational overhead. As you know, our approach, our group internal approach towards training is very much based on personal communication. So we have a lot of travels between our banks, people coming to Germany and especially people coming to our academy. In light of the lockdown measures, travel expenses will reduce significantly both so for internal group purposes as well as travel expenses to clients. If you look in our 2019 report for travel, we account usually some EUR 5 million in expenses, which will reduce substantially in COVID-19 times. Beyond that, we did a lot of cost cutting in the last years, and in 2019, already, we reached a point where there is no more potential for additional cost cutting. We right now, as we presented in the 2019 year-end call, are actually looking also to bolster some back-office functions in our banks as well as for credit holding. And continued growth in the loan portfolio will also require additional front-office staff. Not dramatic increases in staff for sure, but certainly we are, if anything, going in the other direction. For this year, however, we continue to expect operating expenses to remain on the level of 2019, with the slight upside of lower travel expenses as well as the absence of one-off effects, some of which were represented in the administrative overhead in 2019. In terms of assets, we are not considering any asset sales also, as our capital structure and position are fairly independent of let's say, of ratings which can drive risk-weighted assets in other banks. Particularly in our case, this is not so much the case. Also the increase in -- or potential increase in default portfolio should not have a material impact on our capital position.
The next question is from Andreas Schäfer, Bankhaus Lampe.
I have just one question regarding your outlook to achieve, let's say, positive net result with a return on equity below the one of 2019. Is that based on the, let's say, IMF outlook you've given on Page 3, which rather points I would say to a V-shaped recovery in 2021? Or do you have, let's say, other scenarios in place for your outlook?
Indeed, we do base our scenario on the IMF projections, yes, with some recovery or a strong recovery in next year '21. We don't have any other projection or criteria just to do it. We based on that. We have reports from other analysts, but again, we do base our projections on those, on the IMF criteria.
The next question is from Philipp Häßler, Pareto Securities.
Philipp Häßler from Pareto Securities. I have 3 questions, please. Firstly, your capitalization, there have been announced some regulatory relief measures from the ECB. Maybe you could elaborate to what extent you may benefit from these as well? Then secondly, to be honest, I'm not very familiar with the state support programs in Eastern Europe. Maybe you could share some details with us, how they look like in the most important countries like Bulgaria, Serbia. So is it we have something similar like the KfW loans here in Germany? And then the FX, the negative impact on your core tier 1 ratio, is this the EUR 22 million you mentioned?
Let me start on the -- Hello Philipp, first of all, thank you for your question. Let me start with the capitalization question. You may be referring to the CRR2 measures where there are current discussions on the level of the EU parliament to early implement CRR2 in 2020 rather than 2021. And as we already mentioned last time, this will have an alleviating effect on our risk-weighted assets, especially from a reduction of risk-weighted assets on our exposures greater EUR 1.5 million, which represent around 30% of our loan portfolio. This is the most predominant, let's say, regulatory effect that we can expect at this point. Everything else is -- will not affect us materially. For the state support programs, we are following them very closely. Some of them are still in discussion phases and draft phases. Our projections exclude them. We are not relying on any programs in our projections, and we will certainly keep you updated on how we use them. Maybe Gabriel has something to add on these programs?
Just to meant to give you a flavor of what is it planned. Because you mentioned, for example in Bulgaria, there are some fiscal and monetary responses. But the effect of it, we are speaking about a stimulus of, let's say, 2% of GDP for example, compared to the GDP expectation which we have. By that I'm saying there are some programs, and they are not always very transparent. Sometimes they are very bureaucratic. But the amount or the impact, the economic impact of those is relatively small then. Therefore, we don't take it in consideration in our projections. Even credit guarantee schemes, again they are sometimes very bureaucratic. We are not encouraging much of our clients using it.
On your last question, Philipp, on the FX effects, these EUR 22 million on the translation reserve, that is the effect on equity. As ProCredit Holding has its equity invested in local currency in the banks, the EUR 22 million represents the translation effect from converting this local currency to euro as of March 31, so for the first 3 months of the year. On the loan portfolio, the FX effects were stronger. They were around EUR 50 million. On the deposits, they were some EUR 34 million.
But in the presentation, you were mentioning also that the core tier 1 capital came down quarter-on-quarter due to FX effects. And maybe you could give that figure?
That is the translation reserve.
Ah, that's the translation -- okay.
That is the translation reserve, which is part of the group's equity, which came down EUR 22 million in the first 3 months.
So far, we have no further questions. [Operator Instructions] As we have no further questions. I would like to hand back to you, gentlemen, for some closing remarks.
I thank you all for your interest and participation in our analyst call covering the first quarter results. As always, if you have any additional questions, please do not hesitate to contact Christian, Helen or Nadine whenever you want and need.The next scheduled conference call will take place when we publish our Q2 results on the 13th of August 2020. Thank you once again for your participation. Stay healthy, and until next call.