ProCredit Holding AG & Co KGaA

XETRA:PCZ

Earnings Call Transcript 2024-Q1

[Operator]

Ladies and gentlemen, welcome to the ProCredit Holding AG Q1 2024 Results Conference Call. I'm Morits the chorus call operator. I would like to remind you that all participants will be in a listen-only mode and the conference is being recorded. The presentation will be followed by a question-and-answer session. [Operator Instructions]At this time, it's my pleasure to hand over to Hubert Spechtenhauser. Please go ahead, sir.

[Hubert Spechtenhauser, executive]

Thank you, and thank you to EQS for organizing this call. And welcome to everybody on this call on the First Quarter Results of 2024 for the ProCredit Group. My name is Hubert Spechtenhauser. I'm the Chairman of the Management Board. As always, I'm joined by Christian Dagrosa, our Chief Financial Officer. We plan some 40 minutes to cover today's presentation, which has been available since earlier today on our website. We will of course give sufficient time for any questions you may have.Let me also provide you with the usual warning to pay particular attention to the cautionary statements regarding forward-looking comments that you will find at the end of the results presentation. We have the usual structure of today's call. I will take you through the section covering the highlights for the first quarter. Christian will take you through the details of our financial results, credit risk, and asset quality indicators, as well as developments in the Group balance sheet and capital.Let me therefore begin with Slide 2. This is the summary of the strong start the ProCredit Group has had to the year, building on what has already been an extraordinarily successful year 2023. It is always premature to draw firm conclusions from the first quarter results, but we feel encouraged by our quarter one performance as we feel that we delivered strongly on many focus areas of our updated growth business strategy, which we presented earlier this year during our Capital Markets Day. Our loan portfolio grew by a strong 3.0% across all segments and across all banks outside Ukraine. Without the reduction of some EUR 40 million in Ukraine, the growth number would have stood at even 4%. Customer deposits increased similarly, convincingly by 2.8%, which was achieved almost entirely through deposits from private individual clients, as we experienced a minor reduction of SME deposits, which is typical for the first quarter. Loan portfolio quality has remained robust, supporting a low cost of risk for the period of only 2 basis points. The cost-income ratio stood at 61.7%, which is higher than last year, but in line with our expectations given that we are undertaking important investments in staff, IT, and marketing to put us on our solid track for growth for the coming years. With a good profit of EUR 33.5 million, the return on equity stood at a strong level of 13.4%, broadly in line with the previous year and due to the very low cost of risk, slightly above our expectations for this year. Christian will cover the financials in detail. Our CET1 ratio remained steady at 14.3% with a leverage ratio of 9%, albeit the strong balance sheet growth recorded. All-in-all, a very round and robust performance that gives us comfort and confidence to continue on the path we laid out during our Capital Markets Day. It is against this strong performance that we have, as communicated before, proposed to our Annual General Assembly on 4th of June, a dividend payout of EUR 0.64 per share, which is in line with our group dividend policy to pay out one-third of consolidated profit.Let us take a quick look at our quarter one performance vis-a-vis guidance. All our key performance indicators are currently comfortably in line or even somewhat above our expectations. At this point, we can only take note of these positive developments, but because it is still early in the year, we confirm our outlook for the year 2024 of a loan portfolio growth of approximately 10%, a return on equity of 10% to 12%, and a cost-income ratio of approximately 63%. We view the strong business development in Q1 as an adequate kickoff to the ambitious growth agenda we have set to ourselves for the coming years as we plan to broaden our footprint in the region and considerably grow our loan portfolio to more than EUR 10 billion.In spite of the ongoing geopolitical uncertainty on the world stage, we sense that the overall market conditions in our region are benign, with notably growing investment appetite of SMEs and private individuals alike. In this context, we are pleased to have successfully placed a EUR 125 million Green Bond earlier last month, just weeks after presenting our updated business strategy to pave the way for strong impact-oriented growth in the coming years. Investor demand for the notes was strong, shown by both an over subscription and more than 20 international and domestic investors participating in the book building. We find these positive signals from the capital market, particularly encouraging given that the transaction was concluded in mid-April, during days of pronounced geopolitical turmoil in the Middle East and nervous financial markets.Similarly, to our first green bond issued in 2019, the transaction was concluded under the ProCredit Group Green Bond framework, which is evaluated through a second-party opinion by sustainalytics. Given that around 20% of our loans are demonstrably green, the case for the proceeds to be used for environmentally friendly investments only was easy to be made. The bond increases our total capital ratio by approximately 2 percentage points to now 17.7% pro forma as of March and in our estimates can finance over EUR 1 billion of asset growth. Coming back to our regular slide deck, the graphic at the top shows the 3% quarterly growth of the loan portfolio of EUR 187 million. With the exception of ProCredit Bank Ukraine, all banks contributed with consistently convincing growth numbers. Importantly, we achieved growth across all segments, private individuals, micro, small, and medium. While in absolute terms most of this growth was still achieved in the small and medium segments, it's worth noting that we recorded strong relative growth rates in the micro segment of 12.8% and in loans to private individuals of 6.7%. As many of our planned investments in growth catalysts for these segments are yet to materialize in the coming quarters, we are encouraged by these strong developments in these strategically important smaller segments. Overall, we believe we are growing market share whilst maintaining strong client selection and credit risk criteria, as stringent ESG considerations continue to guide our lending decisions. Turning to Slide 6, we see that strong growth in the loan portfolio was matched by strong growth in deposits. In the first three months, we grew by EUR 200 million, an increase of 2.8% that is well distributed across most institutions. The growth was driven almost entirely by deposits from private individuals, showing that the groundwork for our positioning as an attractive bank for private individuals is already quite solid. Term deposits have dominated the growth pattern in quarter one, but we tailor these instruments prudently with typically short maturities as the financial world is anticipating a decline in interest rate in the course of this year. Our deposit-to-loan ratio stands at 116% and has increased by almost 12 percentage points in one-year. The economic situation and outlook of our countries of operation is today visibly more stable than in the months and years immediately after the Russian invasion of Ukraine.Throughout this period, characterized by geopolitical uncertainty, high inflation, trade restrictions, and fears over energy supply and prices, we experience an overall robust attitude from our clients, highlighted by our very stable credit risk indicators. At the same time, appetite for long-term investment was certainly muted, especially producers and wholesalers, they're rather focused on larger short-term working capital loans to hedge themselves against inflationary risks. Today, we observed a renewed optimism in our markets, reflected by higher and more long-term investments by SMEs and strong real estate sectors, especially in the Western Balkans.While the risk for global conflict remains obviously high, we feel arguably more confident than ever about our ability to withstand several global crises. From the Ukraine War, our group has come out more resilient and steadfast and has proven to be highly responsive and agile even under very stressful circumstances. Today, our operations in Ukraine are stable and profitable and at the same time ring-fenced from the Group. And while the global economy may presently face some severe downside risk, we also see ample opportunity in our region for strong and impactful growth and to accompany our countries during the social and economic transition they are going through. It is worth noting on this slide that we can observe an impact -- an intact strong outlook of close to 4% GDP growth for the next years in our markets of operation, which is also well above the euro area.Let me now hand over to Christian for some more details on the financial development of the group in the first quarter.

[Christian Dagrosa, executive]

Thank you, Hubert, and also good afternoon from my side, and welcome to our presentation. In the next couple of slides we will look more closely at the financial performance of the group and go through all the relevant financial captions and key figures, and also cover the major risk indicators as well as our Group's capitalization. One rather general remark, you will note that we no longer present our KPIs with and without the contribution of PCZ Ukraine. As of this reporting cycle, we are in a situation where neither current nor previous year figures are materially influenced by the impact of the war in Ukraine. Moreover, our Ukrainian Bank has shrunk materially over the last 2 years. The share of its loan portfolio in the group decreased from approximately 13% to today 7%, meaning also that the Group's numbers are much less likely to be affected by any developments in this particular market.We moved our regular update slide on Ukraine, which contains various bank-specific KPIs as well as the geographic distribution of our loan portfolio, into the appendix of this quarterly presentation, allowing anybody who is interested to continue following up on the development of the bank to do so. That said, let's start with a high level view on operating income and expenses. Operating income continues to grow year-on-year overall by EUR 13 million, driven above all by further increases in net interest income. We will later see that the quarter-on-quarter dynamics of net interest income are no longer trending upwards, but year-on-year we still see a visible growth, thanks to higher net interest margin, that is driven by the positive repricing dynamic we observed in the course of last year. We will see the details later.Income from fees and commissions as well as from FX transactions has improved only marginally, and other operating income shows a year-on-year reduction of EUR 1.4 million due to less material non-recurring effects in both periods, positive last year and negative this year. Costs increased by approximately EUR 10 million, so less strongly in absolute terms than operating income, but at 18% more strongly in relative terms. Most of these increases come from the strategic investments we've been reporting on in previous calls and which were highlighted during our Capital Markets Day, staff numbers to drive business, IT to optimize processes, and improve customer experience and marketing in branches to increase visibility and accessibility in our markets. The cost-income ratio stands at 61.7%, which is higher than last year, but we anticipated this increase in light of our agenda of strategic investments and laid out our expectations for this indicator in our Capital Markets Day, that is, of course, also reflected in our guidance for this year.Moving on to net interest income. As I mentioned, net interest income continues to show positive year-on-year dynamics, but quarter-on-quarter we see a minor reduction of around 2.7%, driven primarily by the negative days effect in quarter one, as well as reductions in Ukraine and Serbia. In Ukraine, base rates have declined visibly in the course of last quarter, which drives an overall negative pricing effect in this market. Moreover, the continued reduction of portfolio in Ukraine, which shows higher average yields than the rest of the group, leads to a minor but steady negative portfolio effect on the level of the group. In Serbia, the main driver behind the reduction is a strong increase in term deposits in the last two quarters, while loan portfolio growth has remained relatively muted thus far. Moreover, quarter four net interest income in Serbia always tends to be slightly overstated due to seasonal effects in the amount of approximately EUR 1 million. Bottom line, this is largely offset by provisioned expenses in the same amount.In other banks, we observe broadly steady, in some cases even positive, developments of net interest income. The year-on-year increase of EUR 14.6 million is mainly driven by positive pricing effects. However, since this first quarter of 2024, loan growth is again picking up and becoming an important driver of this indicator, given the strong business development that Hubert highlighted earlier. Moving on, quarter one net fee income was broadly steady with respect to quarter one '23, increasing only marginally by around EUR 100,000. Payment services continued to develop nicely and we achieved a good growth in fees from letters of credit and payment guarantees, which is an area we do want to further expand into in the next few years. These positive developments were offset by steadily increasing costs for guarantees, including fees paid to the multilateral investment guarantee agency for ensuring our bank's deposits with local central banks, as well as the European Investment Fund for providing guarantees to SMEs.These structural fee expenses have no corresponding fee income, which is why the development of the net fee income on Group level appears on the surface somewhat stagnant. But the guarantee and insurance agreements we have, obviously have an immense strategic value as they reduce our risk -- our cost of risk and structurally improve our risk-weighted assets, thus reducing capital costs.Moving on to personnel and admin expenses. Quarter-on-quarter, that is, with respect to quarter four, we see reduction in both personnel and admin expenses, which is mainly related to seasonal effects that were very specific to quarter four. We discussed these items during our last call, so I will not dwell. I also already highlighted a year-on-year increase in the cost base of approximately EUR 10 million that is primarily driven by the strategic investments we outlined during our Capital Markets Day, personnel, IT, marketing, and branches. These projects that are key for us to deliver on our medium-term growth targets are now the major driver of our cost base. Contrary, inflation is no longer a meaningful cost driver, which is underlined by the fact that average wages are now only up 3% year-on-year.Nonetheless, personnel expenses as a whole are indeed the major driver behind the increase, as staff numbers on the level of the group are up 14% year-on-year. IT is the second largest contributor to the increase with EUR 1.6 million, though the real increase and investment in IT is higher as this amount only shows the IT costs towards externals, not the IT cost increases produced by the growing overhead of our Group internal IT company. Deposition of other, which adds EUR 2.7 million to the total increase, also includes a small single-digit million amount in expenses for borrowed staff, which is mainly on the level of our IT company, Quipu, and thus can also be considered additional investments in IT.Moving on to loss allowances. Loss allowances remained at a low level in quarter one, that is, EUR300,000, which corresponds to an annualized cost of risk of only 2 basis points. Obviously, this speaks for the prudent approach to provisioning that we have taken in the course of the last 2 years, where we calibrated model parameters to reflect the overall volatile global macroeconomic environment and built management overlays to account for additional risks from the war in Ukraine on the level of the Ukrainian portfolio, some EUR 23 million, and on the level of the remaining group loan portfolio of around EUR 39 million. In quarter one, there were no parameter effects on our loss allowances, provisions related to credit risk events, including the origination of new loans and some additional manage overlays in Ukraine, were almost entirely offset by steady recoveries from written-off loans in the amount of EUR 3.3million.It is worth noting that we have not released any management overlay so far and still hold some EUR 64 million on balance. There is not much to say on portfolio quality other than we recorded a minor decrease in the share of default and a more visible decrease in the share of Stage 2 loans. The share of Stage 2 loans continues to be at an elevated level as more than 50% of our Ukrainian loan portfolio continues to be reflected in this stage given the significant increase in credit risk criteria that is the major trigger for Stage 2 transfer. Our net write-offs have reverted to very low levels of previous years, now at 0.0% after last year's ratio was somewhat elevated again due to the war in Ukraine.Slide 15 shows the structure of our comfortable regulatory capital position. All Tire 1 capital consists of CET1 capital and the risk-weighted asset structure of the group remains simple and standard models are used. As of quarter one '24, our CET1 ratio stands at a comfortable level of 14.3%, well above the regulatory requirements of 9.3%. Our core capital increased by EUR 38 million with respect to the last year, mostly due to the attribution of quarter four '23 and quarter one '24 results, net of one-third of dividend accrual. Please note that our quarterly financial report states a CET1 ratio of 14.0%, as this does not yet include a recognition of quarter one profits due to regulatory capital as of March 31, which we were able to make just after the formal submission of the report.Credit risk-weighted assets increased by 5%, slightly above, but largely in line with the business development in the first quarter. Operational risk-weighted assets increased by approximately EU 90 million due to the annual recalibration of this amount, which is a function of the consolidated operating income, which, as most of you know, has grown substantially in the last 2 years. This effect is also the major driver behind the increase in our risk-weighted asset density indicator, which otherwise would have remained broadly steady at around 64%. As indicated, during our Capital Markets Day, we remain committed to optimizing both our risk-weighted asset structure and our regulatory capital structure.We aim to reduce risk-weighted asset density in the course of the next years through a proven toolkit of different efficiency measures, including the continued expansion of guarantee and insurance programs, as well as an optimized portfolio structure. With the successful placement of green Tier 2 notes in April, we believe to have accomplished an important step towards diversification of capital and now feel that all capital buffers are comfortable to drive the ambitious growth agenda that is central to our updated business strategy.Take a look now at the contribution of individual segments to the group results. In South Eastern Europe, we achieved a good growth of slightly over 4%, with particularly good developments in Albania, Kosovo, Bosnia, and Bulgaria. The ROE of the segment is at a strong level of 16.3% and the cost-income ratio at 55%. In Eastern Europe, our portfolio declined slightly by 0.7%, mostly due to a EUR 42 million reduction In Ukraine. Our banks in Georgia and Moldova, on the other hand, grew strongly by 5% and 7%, respectively. The Eastern Europe segment contributed EUR 11.6 million to the consolidated profit, which corresponds to return on equity of 20.6% and the cost-income ratio is at a good level of 45%.Our Ecuadorian bank continues to weather what is an undoubtedly challenging environment for banks, international banks in particular. The bank is making steady progress in building a portfolio of loans to small and very small enterprises and private individuals, and divest from loans to larger SMEs, which are subject to unreasonable price caps. With these strategic measures, the bank has managed to increase the weighted average interest rate of its loan portfolio by almost 1 percentage point year-on-year. As of quarter one, we only see a moderate net growth of 1.6% in the loan book and a minor loss of EUR 1.1 million.Moving on with some more details on the level of the banks of the segments. In South Eastern Europe, we see stable and positive KPIs on the level of almost all banks, which is why I won't dwell long on this slide. However, we should note that in light of the strategic investments we intend to undertake, especially in 2024 and 2025, we expect indicators to start deteriorating somewhat in the smaller banks of the segment in the coming quarters. In Romania, we already see an increase in the cost-income ratio, which reflects exactly this expectation. The same can be said about our banks in Moldova and Georgia, though as of now, Georgia, like Ukraine, still displays a solid development of profitability and cost efficiency.In Moldova, both ROE and cost-income ratio reduced with respect to last year as the bank's cost base increased by 25% year-on-year in light of very good advancements with important investment projects. Moreover, like in Ukraine, Moldova experienced a substantial drop in policy rates from more than 20% in 2022 to currently slightly less than 4%, thus driving a reduction in the bank's net interest margin of 1.5 percentage points. On Ecuador, I believe all has been said on the previous slide. And with that, let me conclude our assessment of our Group's performance in the first quarter of 2024. Hubert will wrap up with a medium-term outlook before we take your questions.

[Hubert Spechtenhauser, executive]

Thank you, Christian. Most of you will know that we lifted our medium-term outlook at the beginning of the year. We provided details on our growth and profitability targets during our Capital Markets Day earlier in March. Though there is still a long way ahead of us, we had exactly the beginning of the financial year 2024 we were aiming at, strong, diversified, and impact-oriented loan growth, that underscores our aspirations in all segments and that is entirely financed through local deposits, primarily from private individual clients.Good profitability with important investments in growth catalysts well underway and the successful placement of a T2 bond, which paves the way for substantial growth and further strengthens our impact positioning. In that sense, today I can confirm that we are on the right path towards our medium-term goals. With that positive outlook, I would now close today's call. Christian and I will now take your questions.

[Operator]

Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions]. And the first question comes from Milosz Papst from Edison Group. Please go ahead.

[Milosz Papst, analyst]

Yes, hi. Thank you for taking my questions. My first question relates to the maturities and your plans in terms of refinancing your other Tier 2 capital for the other subordinated debt, which was at EUR 139 million at the end of 2023. I mean, we can get some general idea with this respect based on the liquidity and funding risk section of the annual report, which shows the undiscovered cash flows from the subordinate debt, but maybe you can add some color around the maturities of this debt and what your plans are in terms of refinancing it.

[Hubert Spechtenhauser, executive]

Sure, Milosz. Let me, first of all, advise you that these maturities are visible in our annual report, so there's a maturity structure table in the IFRS 7 disclosures. You probably are pointing to an important point, that is, that some of these instruments are indeed already reaching the point at which they can no longer be fully attributed to Tier 2 capital, hence the difference also in our Tier 2 capital versus the balance sheet subordinated debt. These instruments that are no longer -- that cannot be fully attributed to Tier 2 capital. They were issued some 10, 15 years ago, and they don't have an early repayment option, so they will be held until maturity, but many of them are maturing indeed, in the next, I would say, 18 months. Otherwise, the remaining instruments that can still be fully attributed to Tier 2 capital, they will have early repayment options, and then we will have to decide on a case-by-case basis how to proceed with these instruments. The newly issued bond, on the other hand, has a maturity of 10 years and a quarter.

[Milosz Papst, analyst]

Okay, perfect. Then my second question will be on the salaries growth because you reported that it was very moderate, 3% year-over-year, I think in 2023, it was 8%, right, so we are basically [indiscernible] 12-month period by a quarter, and I just wonder if this includes -- the 3% like growth includes a base effect from some major salary revisions in Q1 last year. If you could remind us what those situation was here would be helpful.

[Christian Dagrosa, executive]

Indeed. Typically, we conduct a group-wide salary review that usually takes place in the third quarter of each year. So, if you like, the year-on-year increase takes into account the structural increases that were concentrated in the months of July to September.

[Milosz Papst, analyst]

Okay. And do you expect this 3% year-over-year growth to be sustained in the coming quarters, or do you expect to pick up, given your expansion in headcount?

[Hubert Spechtenhauser, executive]

Yes, I think it's a good run rate, and it's simply to say that until the end of the year, and probably also the good part of the next year, personnel -- increases in personnel expenses will be volume-driven rather than -- will largely be volume driven rather than pricing-driven.

[Milosz Papst, analyst]

Okay, perfect. And then I also have a question on the repricing on your asset liability side. I mean, in Q1, it was still net positive. If we assume stable rates, what should we expect in the coming quarters? Should be net positive replace -- should net repricing be still slightly positive or more like neutral or moving the negative territory?

[Christian Dagrosa, executive]

I think at this point, a bit difficult to say for the consolidated level, one would need to go really market-by-market. Like I said, one important dynamic is Ukraine, which even though the loan portfolio is not very big anymore. There is a big pricing effect year-on-year and as we lost portfolio, there is then also a volume effect that on a group level reflects then in a structural effect of the portfolio. In most of the other markets and I mentioned Serbia as the one major exception, in most of the other markets, net interest income is stable or is growing broadly in line with volume, which means broadly stable pricing effects and some volume effect. However, our expectation is indeed, and I think we outlined this in the Capital Markets Day, that the net interest margin will stabilize at the level of the full year 2023, more or less, and not continue on the run rate that was provided in Q3 or Q4.

[Milosz Papst, analyst]

Sure. Thank you. And my last question will be on obviously the recent Russian advances around [indiscernible] and the impact on your provisioning, so I just wonder if the EUR 2.2 million management overlays in Q1 are somewhat related to this region or aren't really.

[Hubert Spechtenhauser, executive]

Not really. They are not really linked to this very recent development. Bear in mind, that in Ukraine we have a very specific situation that we have built over the last couple of years, very substantial overlays, which we are reflecting the overall general uncertainty surrounding this ongoing war. So as of now, we have in Ukraine overlays of EUR 25 million out of the EUR 64 million overlays we have at a group level. So we think that overall, we ought to be adequately provisioned in Ukraine also to cover this macroeconomic uncertainty which is driven by this ongoing attacks, but we have no specific links now specifically to each single attack in particular, if it is very recent, because bear in mind, it's a very dynamic development where we have to -- where we try to capture the overall uncertainty as good as we can by building more than conservative overlays, and we see our approach confirmed by the fact that the credit risk parameters confirmed that in the first quarter and resulted in a very low cost of risk at the group level, but also in particular in Ukraine.The additional cost of risk which we saw in Ukraine in the first quarter there, exclusively driven by additional overlays, which we built for the portfolio in Ukraine. Also, please bear in mind, that the overall size of the loan portfolio in Ukraine, which at the beginning of the war was in the region of EUR 800 million, has decreased now to EUR 450 million. So the relative size of the contribution of Ukraine to our loan portfolio has reduced from north of 13% to something like 7.1% by now.

[Milosz Papst, analyst]

Sure. Thank you. That's very helpful.

[Christian Dagrosa, executive]

Let me also add, Milosz, that our Kharkiv branch has already been closed in late 2022, and most of the portfolio of that Kharkiv branch is in the red zone, most of which is already classified as defaulted, and this red zone has already reduced quite significantly, so the -- let's say, as long as this conflict sort of centers around this region, the impact on the loan portfolio will not be hugely material.

[Milosz Papst, analyst]

Perfect. Thank you very much.

[Operator]

And the next question comes from Marius Fuhrberg from Warburg Research. Please go ahead.

[Marius Fuhrberg, analyst]

Yes, hi. A couple of questions from my side as well, please. First of all, as you mentioned specifically strong growth in your smaller customer segments, can you give us an update on how comparable the terms are within these segments compared to your current portfolio? The second question with regards to the risk costs, you mentioned the rather strong way of recovery, is it fair to assume that a major driver of these recoveries come from Ukraine and what are your expectations with regard to recoveries over the next couple of quarters?And last question, with regards to net fee income, I mean, should this number scale with your number of customers, and as you should experience strong customer growth, should this grow as well? And also, in addition to that, the guarantees you mentioned that were kind of hindering a better development, does this also scale with the number of customers or where does it relate to and how are your expectations for net fee income over the next couple of quarters?

[Christian Dagrosa, executive]

Thank you, Marius. I will take the questions in order. So the growth structure in quarter one was, on the one hand, obviously encouraging, because especially in the smaller segments we had strong relative growth in PI of around 6% and very small, even two-digit. In absolute terms, we are not yet there where we want it to be. So still -- the majority of the growth came from the medium segment followed by the small segment, but it's not quite yet the transformation we wanted to achieve, but that's obviously not necessarily what we expected to see in the very first quarter after the Capital Markets Day. But the signs of the good growth in the first quarter are a good indication.In terms of pricing in PI, and let me start with very small -- in very small, the pricing is in average, the highest is a high-single-digit percentage rate here and there, plus, minus, depending on the market. In PI, we have both housing loans, which obviously have relatively low rates, as well as what is not housing is mostly investment loans in, for example, house refurbishments, solar panels, or electric cars, here we have higher rates that are slightly below the micro segment, but somewhat above the smaller segment.On the recoveries, the assumption that these come from Ukraine is not correct. Indeed, recoveries from written-off loans in Ukraine only made EUR 150,000 of the total recoveries of EUR 3.3 million. These amounts, they are broadly spread over several banks. The largest contributor is indeed Kosovo with EUR 870,000. And we've had these type of -- this level of recovery is relatively steady for many, many years. It is not obviously reasonable to assume that this will continue in perpetuity, but for now, we see this as a good run rate at least for the short term of quarterly recoveries.And on your last question, on net fees, you are in a way right that you would expect this to correlate with client numbers in very broad terms, but there are various effects at play. I mentioned that the net fee figure that we sort of have a positive gross effect on the income side that is offset by these more strategic insurance and guarantee programs that are on the expense side, obviously also, increased transaction volume increases the fees for transactions somewhat, so this creates a dynamic that makes it seem that net fees are stagnant, but the major driver in the expense side are indeed these insurance and guarantee programs.There are other effects in net fees why it may not fully correlate with number of clients. In the past, we charged, for example, private individuals a flat fee for account maintenance fee that was comparatively high for our markets in the context of a very exclusive offer -- of a very exclusive positioning of our offer. Due to our renewed focus on the PI segment, we introduced different offers that are at a lower price to attract larger volumes of clients that will no longer produce the same sort of fee income as other clients. So in a way, we're trading numbers against high fee per client. So the expectation for net fee income, I think for this year at least, is that it would probably grow more or less in line with the number of client growth with a caveat that we are obviously always working on increasing the frameworks for strategic insurance and guarantee programs.

[Marius Fuhrberg, analyst]

Perfect. And one follow-up, if I may, on the recoveries and associated with that, the risk costs so, as we saw 2 basis points now, what would it take or is it fair to assume that to be in line with your up to 40 basis points guidance for 2024, this would presumably stem from yet significantly higher loss allowances over the next quarters?

[Christian Dagrosa, executive]

Yes and no Marius. I think I would be cautious to take the quarter one cost of risk as a run rate for the rest of the year. It's extraordinarily low, especially in what is still in -- from a globally geopolitical and macroeconomic point of view, a volatile environment, at the same time, the guidance says up to 40 basis points, so this would indeed be not a stress scenario, but a bit of a downside scenario within what is reasonably possible. So a reasonable run rate probably lies somewhere in between, but closer to the 40 basis point than to the 3 basis points.

[Marius Fuhrberg, analyst]

Perfect. Thank you very much.

[Christian Dagrosa, executive]

You're welcome.

[Operator]

And the next question comes from Philipp Häßler from Pareto Securities. Please go ahead.

[Philipp Häßler, analyst]

Yes, hello. Thank you. Do I have two questions, please? Firstly, on your total capital ratio, the pro forma capital ratio post the Tier 2 issuance will be 17.7%, is this a sufficient ratio for you or maybe you can level on this? I mean, I assume if there will be maturities in the next quarter so over the next 18 months, what you said you would replace them, but is the around 18% a sufficient ratio? And then also on the interest expenses for the new bond, am I right in assuming that this will show up under interest expenses like always?And then on the situation in the Ukraine, maybe you can comment or explain a little bit more how you see the -- how do you see the situation? What's the feedback you get from your employees? So maybe some insight into how you see the situation, particularly due to the increased attacks from Russia. How do you see the risk of spreading -- the war spreading again to other areas of the Ukraine? Thank you.

[Hubert Spechtenhauser, executive]

Well, Mr. Hassler, let me take the first question that you had on the total capital ratio. Yes, indeed, we see this as very adequate. We are very happy about the increase. This issuance of the T2 bond increased our total capital ratio by approximately 190 basis points to 200 basis points, giving us by now a capital buffer at the level of the total capital ratio in the region of 300 basis points, which we think is very adequate. We have an even higher buffer if you look at the CET1 ratio, but up until now, before we issued this Tier 2 instrument, the buffer was way lower compared to the buffer, which we had at the CET1 level, and therefore, we see it also as a way to optimize our capital structure. And it is indeed, from our perspective, a very important step now to be implemented right at the beginning of our increased growth ambitions which we laid out in the Capital Markets Day. Therefore, we are very happy to have this ratio achieved now which will allow us to grow much more strongly than we did in the last year. So we cut a long story short, we see it as very adequate and sufficient, as you said.On Ukraine, let me once again reemphasize that the default is back and forth on the battleground. Ukraine still continues to prove as a country to be very resilient, and we, if you look at our bank, can -- we confirm the same from our bank. Our bank is and continues to be fully operational. It has reduced the portfolio slightly to EUR 450 million approximately the loan portfolio. It has increased the deposits over the first quarter and it has contributed fairly substantially with close to EUR 8 million to the first quarter result.So as far as our bank is concerned, we still continue to work on improving the performance of the bank and in particular to prepare for some sort of stabilization, so that in case the situation were to stabilize at some moment in time, our bank could play a very important role in rebuilding the country. And as you know, the situation on the battleground is still volatile, and that's one of the reasons why, as outlined before, we have substantial overlays in particular on our Ukrainian portfolio.

[Christian Dagrosa, executive]

Let me just confirm, Philipp, that indeed the interest expenses of the bond are booked through the P&L in interest expenses.

[Philipp Häßler, analyst]

Perfect. Thank you very much.

[Operator]

So there are no further questions at this time, so I would like to turn the conference back over to Hubert Spechtenhauser for any closing remarks.

[Hubert Spechtenhauser, executive]

Well, thank you all for your interest and your participation in our analyst call covering our first quarter results. We hope to have given you as much transparency as possible. If you have any additional questions, please do not hesitate to contact [indiscernible]. The next scheduled conference call will take place when we publish our quarter two results on August 14. Thank you once again for your participation.