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Thank you to EQS for organizing this call, and welcome to everybody on this call on the 2020 Second Quarter Results of the ProCredit Holding. My name is Gabriel Schor. I am a member of the ProCredit Holding Management Board. Today, as usual, I'm joined by Christian Dagrosa, who will take you through the financial section of this presentation.We plan some 40 minutes to cover today's presentation, which has been available since earlier today on our website. As usual, we will give some 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. Firstly, I will take you through the section covering the highlights, the main issues of our second quarter and half year results. Christian will then take you through the details of what does this mean for our financial results, asset quality indicators as well as developments in the group balance sheet and capital.Our focus will inevitably be on how we are responding to the difficult environment created by the COVID-19 pandemic in our countries of operation. Generally, though, you will hear from us a rather positive view of where the group stands today.In the last quarter, we have been able to continue to grow our core business whilst managing credit risk costs in line with the expectations. There has not yet been a significant deterioration in the level of impaired loans, and our capital level are strong. We believe this is a good position to be in as the economies we work begin to steady and hopefully move towards recovery.Our confidence also reflects the mood of most of our clients. But of course, it comes with all the inevitable uncertainty caveats that the pandemic implies.If we turn to Slide 2, this is a summary of where the ProCredit Group stands midyear. Clearly, the social and economic context of quarter 2 has been challenging. But as governments, people and clients respond in the measured way, the ProCredit Group has found opportunities for business growth.Q2 saw strong growth of over 4% in both customer loans and deposits, reflecting our continued commitment to further strengthening our market position. Growth was with existing and with new target clients. The loan portfolio grew more in longer-term investments and green loans than short-term working capital loans.At the same time, we achieved solid financial results. Our profit for the period was EUR 21.7 million, representing an annualized return on equity of 5.5%, only a little down of our profit for the same period of last year. Our profit before provisions and taxes was significantly up on 2019, our half year results compared to the same period last year, so net interest income up and operating expenses down. But of course, also a significant increase in cost of credit risk, driven more by negative macroeconomic assumptions than a significant decline in portfolio quality. In these terms, we also remain comfortable regarding our risk profile midyear.Credit risk is clearly our foremost focus. We are encouraged, though, that loan portfolio quality remains good with credit-impaired loans standing at 2.5%, 10 basis points above the Q1 figures and in line with the year-end figures. At the same time, the coverage ratio is steady at 93.6%, remembering that we also have good collateral, of which 14% consists of cash and financial guarantees from IFS.Our business client advisers and credit risk teams are currently conducting a comprehensive analysis of every exposure in their portfolio in order to assess credit risk in the context of pandemic. At this stage, we observe our SME to be relatively robust and forward-looking. Few have dismissed employees, and at this stage, we are reassured that about the increasing number of clients who voluntarily no longer want to take advantage of any moratoria or grace period. Naturally, we expect a certain deterioration of portfolio quality in the second half of the year, and we will come back to cover credit risk in more detail.Liquidity levels are also comfortable, supported by good growth in deposits as well as support from longer-term loans, particularly from IFS.Our capital position is strong. Our CET1 ratio actually increased in Q2 to 14.1% despite our solid growth, which also reflects the partial use of the SME risk weighting introduced in Q2 by the EU parliament. Profits for the year 2019 were also recognized as CET1 capital net of our planned dividend of 1/3 of the group 2019 results, which continues to be deducted in anticipation of the decision later in the fourth quarter of this year. Our leverage ratio is a high 10.3%.Looking forward, we continue to see scope for growth, and so update our guidance for loan portfolio growth to 8% to 10%, excluding any significant FX effect. Otherwise, we confirm our guidance for the year. In this guidance, we prudently assume a cost of credit risk of around 75 basis points.Overall, based on the first 6 months of the year, we look to the second half of the year with continued confidence. This confidence is reinforced by the fundamental of our business model. Slide 3 highlights there for you already familiar key aspect of this model, which help us manage the current challenging environment effectively.The most obvious advantage we've had in Q2 was the benefit of having a very efficient branch structure and a digital model for all routine transactions. This has meant we have been able to focus on core business and client relations rather than processes. This was central to enabling good growth in the past quarter and has very much helped in our market position and attracting forward-looking clients.Our Hausbank for SME, another element of our business model, has also come to its own, as almost everyone recognized the central role that SME will play in supporting economic recovery. In this context, it was valuable to secure an additional EUR 100 million financing from the IFC. Particularly in the current market environment in which SME find it increasingly difficult to secure financing, we want to continue our support to them.In these terms, our clear impact orientation can also being seen in the strong growth we achieved in Q2 in our green and renewable energy loan portfolio of 8.4%. It is very rewarding, I have to say, to be actively driving the transition to a greater sustainability and not just talking about it.Of course, we have -- also have to highlight our long track record of good loan portfolio quality built on the pillars of careful client selection, close client relations and experienced staff. In the current context, these 3 strengths are invaluable.Moratoria on debt repayments remain a feature in all of our countries of operations. They are useful for client, but it is important also that as far as possible, all the applications for a moratorium or extension, they are analyzed by our staff to assess whether additional measures or risk rating are necessary.All in all, our business model continues to provide a solid basis for continued profitable growth and prudent risk management. We believe that the value of ProCredit's steady service quality becomes more evident in the current environment, and there continue to be opportunities in our markets, which we take advantage of.On that note, let me turn to Slide 4. This provides an overview of the current market environment in our countries of operation. We described on our last call last that, generally, governments have been relatively consequent in reacting promptly and firmly to the pandemic. State of emergency and lockdown measures were imposed in most countries in early March. As a result, debt rate has been lower than in Eastern Europe. Lockdown measures were lifted in most markets in June. Since then, there has been an increase in infections rate in most countries, but they are still felt to be generally under control. It remains to be seen whether and if so, in what form, the second wave of infections occurs.Moratoria on debt payments are still available in most countries. The exact form differs by country. Most schemes are still up in schemes that this moratorium is granted, if requested by a client. Only Serbia has an opt-out scheme that these loans have to be granted the moratorium unless a client proactively requests not to have one.The full macroeconomic impact still remain not easy to assess. But based on the experience of our clients, there was certainly a very marked reduction in economic activity in Q2. However, there were signs of improvements already in June that is relatively promptly after the lifting of the lockdown. Of course, much depends on how quickly market confidence return.Generally, it is assumed our countries will experience a sharp GDP decline in this year of around minus 4% to 5%. But consumer confidence and buying power will return quite promptly to drive strong economic growth in 2021.Slide 5 provides a little more detail on key credit risk indicators that I have already mentioned. To start with, the portfolio in moratorium. The share of loans portfolio under moratorium fell from a peak of 34.7% during the quarter to 17.8% at the end of June. As of end of July, this figure dropped further to 12%. However, it is likely to increase again as the opt-out scheme in Serbia have been reintroduced in August.We are very encouraged, though, by the fact that the larger part of our client in Serbia proactively opted out of the new moratorium. If we include the impact of Serbia, the share of portfolio under moratorium peaked in Q2 at 27% and at the end of June stood at 12%.Only in Ecuador, the level remains still relatively high, 37%. In all other banks, it is well below 20%; in some cases, close to 10%. By economic sector, only HORECA, hotels, restaurants, catering, is above 40%, but HORECA accounts only 4% of the group portfolio.Overall, we believe the use of moratoria reflects still uncertain macroeconomic environment for our clients but one that is steady rather than deteriorating, particularly in line with a much reduced share of moratorium in our portfolio. At this stage, we still do not observe significant deterioration in loan portfolio quality. There is an increase in Stage 2 loans to 5.3% at the end of Q2. The level of Stage 3 loans is pretty constant at 2.5%.Relatively steady portfolio quality is also reflected in our provisioning expenses, which at 67 basis points are in line with expectations. The main driver of the increase in provision expense has been the negative macroeconomic assumptions. In the waterfall at the bottom of this slide, you can see that this accounts for about half of the total provisioning cost in the first half of the year.Looking forward, we still expect a certain further deterioration of loan portfolio as the full impact of the pandemic-induced macroeconomic downturn works its way through the most affected sectors and countries. Hence, we expect a cost of risk of approximately 75 basis point over the year.On Slide 6, you can see the growth in our customer loan portfolio. We grew by strong EUR 213 million in the second quarter. Growth was particularly focused in our Southeastern Europe region. Notable is that the growth has not just been in short-term working capital loans but above all in longer-term investments and green loans. This growth come from both existing and new clients, reflecting certain confidence from SME, particularly in the month of June, and also the effectiveness of our acquisition activities.It is important to mention again, we are growing whilst maintaining our strict client selection criteria, so we comfortably believe this means we have been able to further strengthen our market position with our target SMEs. Of course, our growth figure were supported by the absence of repayment on loans in moratoria.The green loan portfolio grew by a strong 8.4% in Q2. That is some 31% of the total growth. When 31%, sorry, of the total growth come from green loans. The green loan portfolio continues to enjoy a very high portfolio quality. The default rate of green loan portfolio is only 0.6%, which is 1.9 percentage points lower than for the total loan portfolio.Strategically, we also see strong growth opportunities here, particularly in renewable energy. We believe that the major team emerging from this crisis will be the future-proofing industrial development to be more climate-friendly. And here, we are well positioned to support development in this direction and have invested in significant staff capacities for renewable energy project finance in the last 2 years.Turning to Slide 7, you see that the strong growth in loan portfolio was complemented by an equally encouraging development in deposits in Q2. Year-on-year deposit volume increased by EUR 588 million or 15%. In the second quarter alone, deposits grew by 4.2%. Growth was achieving both business and private clients from both new and existing clients. We are reassured that the growth above all come from current and flexible savings accounts rather than more expensive TDAs.Year-on-year current and savings account have grown by 20% and 23%, respectively, whilst TDAs at only 6%. This has positive impact on our cost of funds. We believe these results highlights the growing appeal of our digital approach, particularly in the pandemic context. Certainly has been a huge benefit to have had virtually no disruptions to regular business activity since, basically, all our clients were already using Internet, mobile and card for all their transactions.We continue to invest in innovative digital solutions across the group. For example, we introduced remote onboarding of a client in Q2 in those market in which regulators allow online identification of individual. Once again, it is worth highlighting that all our clients conduct their transactions exclusively via online channels, meaning we have virtually eliminated over-the-counter and a cash transaction from our branches and service points.Slide 8 summarizes where the group stand midyear relative to our 2020 guidance. In terms of loan portfolio growth, we are ahead of our original more cautious guidance. So as mentioned earlier, we are now updating our guidance to 8% to 10%, excluding strong currency volatility.We have achieved a steady 5.5% annualized return on equity in this half year, which is in line with our guidance for the full year. Our cost-income ratio was a good 66.5%, which shows the improved underlying operational profitability of the group compared to 2019.At 14.1%, our CET ratio remained comfortably about our guidance to keep CET ratio above 13%. For this year, we continue to approve for dividends in line with our dividend distribution policy that is 1/3 of consolidated profits. Generally, we remain confident in the midterm prospects for our markets and for group performance and explicitly confirm of the medium-term targets.And now let me hand over to Christian to cover the financial aspect of the growth results with much more detail.
Thank you, Gabriel, and good afternoon to everyone also from my side. As usual, at this stage of our presentation, I will, in the next 15-plus minutes, go through the group's financial performance as well as various risk topics.We start on Slide 10 with the year-on-year view on the major financial captions of the first half year. Our net interest income shows a good increase compared to the previous year, EUR 7.2 million or 7.8% compared to 2019, driven by the steady portfolio growth of the last 12 months.Our loan loss provisions increased in line with our expectations by EUR 11.6 million. In here, we see primarily the deterioration of the overall macroeconomic outlook reflected due to which the overall statistical expected loss in our portfolio increased.Additional provisions also come from an increase in Stage 2 loans, which is foremost a result of the fact that all loan exposures are currently being reassessed individually in the context of the specific impact of the pandemic on each client.Our net fee income came down some EUR 3.2 million compared to last year, which reflects the marked reduction in transaction business we have observed since the outbreak of the pandemic and also some lower income from account maintenance fee. The result of other operating income improved by EUR 2.5 million with respect to the previous year, which really is a reflection of the absence of any material negative one-off effects from restructurings that have affected previous year periods.Operating expenses came down slightly by circa 1% in spite of higher staff numbers. Though travel restrictions have had some positive impact on our operational overhead, the stability of the cost base, in light of the strong growth in the past, typically 2 digits per annum, underlines the good potential for scalability of our business model.The net profit of EUR 21.7 million is only slightly EUR 1.2 million to be precise below the previous year and corresponds to an annualized return on equity of 5.5%. In light of the much increased cost of risk of more than EUR 11 million, we consider this a good result that underscores the solidity of the business model and the resilience of our portfolio.The cost-income ratio improved visibly from almost 71% last year to 66.5% today, reflecting the much improved underlying profitability. The results before taxes and loan loss expenses, which, in some way, mirrors the cost-income ratio, increased by EUR 8.7 million or 26% with respect to the first half year of 2019.Let us now move on to the quarter-by-quarter details of the most relevant P&L items, obviously, focusing on quarter 2 of 2020 and starting with the net interest income. As mentioned earlier, net interest income shows a positive trend year-on-year with almost 8% growth. With respect to the first quarter, we see a decline of EUR 1.9 million, which can largely be attributed to the reduction in base rate of our Eastern European segment. Particularly in Ukraine, rates came down by more than half since the beginning of the year and now seem to stabilize at around 6%.At the same time of the year in 2019, so in June 2019, the base rate was still at 17%. As a consequence, interest income from liquid assets that includes central bank reserves and typically, short-term treasury bills, came down by EUR 3.2 million in the second quarter compared to the first quarter.Compared to last year, liquid assets also increased by more than 20% or EUR 200 million, which obviously gives comfort in distressed macroeconomic environment on the one hand, but which also affects net interest margin negatively on the other hand due to higher -- due to the higher asset base.In most of our countries outside our Eastern European segment, net interest income is developing steadily in line with portfolio growth. On a consolidated level, the net interest income was at EUR 49 million in quarter 2 with net interest margin at 2.9%.Provisioning expenses in quarter 2 correspond to an annualized cost of risk of 71 basis points, which is broadly in line with our expectations. In the second quarter, we performed a second update of our macroeconomic assumptions and our credit risk model to reflect the most recent economic forecast. In quarter 1, the impact of updating macroeconomic factors on total provisions was around EUR 5 million. In quarter 2, the effect was of another EUR 3 million.Besides that, Stage 2 loans increased in the second quarter by around EUR 45 million as a result of our client-specific intensified monitoring in COVID times, which Gabriel already mentioned earlier. The default portfolio increased in nominal terms by around EUR 7 million, but the share of default in the total loan portfolio remained stable at 2.5%.Net fee income came down with respect to previous quarters, especially as our transaction business reduced visibly since the outbreak of the pandemic. We were encouraged to see that the number of transactions picked up in June by more than 10% with respect to May and remain hopeful for this trend to continue going forward.In addition, fee income from private individuals, particularly from account maintenance fee, has 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 in the last 2 years led to a reduction in client numbers, which by now has leveled out.Slide 14 shows the development of our cost base, which continues to develop positively. It should be noted here that the impact of the pandemic on our lending and branch operations has been very limited. We have not made use of any short-term working model for employees and quite contrarily, to most banks even selectively increased staff, in line with our HR plan by 127 this year. The reduction of operational overhead comes primarily from lower traveling and marketing expenses, which is in part related to the lockdown measures, of course, and which more than offset the increase in personnel expenses of EUR 2.5 million.The cost-income ratio is visibly lower -- is at visibly lower levels this year than in 2019. Pre-provision income is up, and the cost base remains stable. Compared to quarter 1, the cost-income ratio increased mainly due to the onetime annual expense recognition of the Bulgarian deposit insurance scheme of around EUR 3.5 million reflected in the net other operating income. This, as you may know, is a yearly charge that always falls into the second quarter. In the absence of this charge, the cost-income ratio would have remained broadly stable with respect to the first quarter.Moving to Slide 15 and looking at the contribution of the individual segments in the first half of the year. In Southeastern Europe, we have our 7 banks in around the periphery of the EU zone. That is Albania, Bosnia and Herzegovina, Bulgaria, Kosovo, North Macedonia, Romania and Serbia. Here, we achieved a strong growth of 6.5%. Please note that the growth figures are not annualized, so the growth in this segment in this half year was particularly strong. And also, we achieved a slightly improved cost-income ratio of 68%, driven by increased net interest income on the back of a stable cost base. The Southeastern Europe segment contributed EUR 13.3 million to the consolidated result.In Eastern Europe, our portfolio only increased slightly in the first half year as strong currency effects negatively impacted the solid business-driven growth. Worth highlighting is the very strong growth in our Moldovan bank of 14% in the first 6 months of this year, which is net of FX effects.As already mentioned, the net interest margin was impacted due to lower base rates in all countries of this segment declining 40 basis points to 4.2%. The cost-income ratio further improved by 1.7 percentage points to 42%, whereas the ROE came down to 11.7% due to higher provisions as well as the lower margins.South America remained our smallest but at the same time fastest-growing segment. In the first 6 months, our bank in Ecuador grew 11.4% and, thus, increased net interest income year-on-year by 19%, resulting in a much improved cost-income ratio. The loss at the half year of around EUR 900,000 comes from an increase in provisions of EUR 2.1 million, resulting from the more subdued macroeconomic environment.You know by now that our group functions comprise 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 payment clearing and liquidity support functions.Let us move to credit risk. On Slide 17, we see the high level of diversification of our loan portfolio, which you already know by now, both in terms of geographic coverage and industry sector. On the left, you see the good geographic diversification with 4 banks accounting for 10% or more of the portfolio. And on the right, you see that now 94%, previously 93%, of our loan portfolio is accounted for by business loans, 99% by business and housing loans to private individuals combined.You know that we do not engage in any meaningful consumer lending and expect consumer lending portfolios to be among the most affected ones, especially once moratoria and grace periods are lifted.Of our overall loan portfolio, 20% are to agricultural enterprises and a further 23% is comprised of loans to companies involved in local production. 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 headwind. The default portfolio remained stable at 2.5% with respect to the end of 2019. At the same time, the coverage ratio increased to almost 94% due to the additional portfolio provisions resulting from the update of macroeconomic parameters as well as new provisions in Stage 2.Our Stage 2 portfolio increased to 5.3%. As already highlighted before, we are assessing the impact of the pandemic on each individual loan exposure in our portfolio. The increase in Stage 2 is basically a result of that granular work and comes from certain exposures in which we determined a significant increase in credit risk from the pandemic.Restructurings have, thus far, been minimal. We performed this reassessment regardless of whether a client is in moratorium or not. All clients are assessed following group-wide standardized procedures, which results in an updated risk classification for each client. This allows for an in-depth visibility of the quality of our portfolio, a great understanding of credit risk and exposures that are in moratorium and it provides a very solid basis for our provisioning.Moving on to Slide 19. You are obviously very used to the slide by now. And naturally, it is more relevant today than ever before. You can see the large part of our collateral consists of mortgages. An additional 14% is accounted for by cash and high-quality financial guarantees, which mainly result from the InnovFin initiative and other guarantee programs provided by the European Investment Fund. In this graph, we do not include any state-guarantee schemes nor are these schemes considered in our provisioning.Let me once again highlight our strict approach towards collateral. We always require high collateral coverage for all medium- and long-term loans, which at around 70% from the largest part of our group portfolio. Short-term working capital loans can be granted without collateral, but they are typically only provided to clients we have had long business relationships with and whose businesses we know inside out. Working capital loans from the much smaller part of our portfolio. For the valuation of collateral, we rely on specialist staff, external experts as well as regular monitoring.At this point, let me conclude our presentation by summarizing the simple balance sheet and capital funding structure of the group and by showing the development of our CET1 ratio in the first quarter. Slide 21 shows our simple and stable asset structure and its development in the last 6 months. Total assets have increased, particularly due to the strong portfolio growth in the first half, offsetting a reduction of some excess liquidity, which was available at year-end.On Slide 22, we see the increase in liabilities, which is, above all, driven by customer deposits, notably site deposits. The reduction in equity is primarily driven by negative FX effects, which are reflected in a decline of the translation reserve of some EUR 19 million as well as the purchase of minority shares in ProCredit Bank Ukraine earlier in January due to which there are no more noncontrolling interests in the group's equity.On Slide 23, you see our comfortable liquidity position underpinned by a liquidity coverage ratio of 142%, well above the regulatory minimum of 100%. As mentioned earlier in the context of net interest margin, highly liquid assets increased year-on-year strongly by EUR 200 million, and this figure does not yet include the additional $100 million financing that we received in mid-July from the IFC.Slide 24 shows the structure of our comfortable regulatory capital position. By now, most of you are already familiar with our simple capital structure: all Tier 1 capital consists of CET1 capital. The risk-weighted assets structure of the group remains simple, and standard models are used. Risk-weighted assets are, in principle, dominated by credit risk. And currency risk is, in essence, the local currency equity position of the holding.As of June, our CET1 ratio remained stable with respect to the year-end 2019. The leverage ratio of 10.3% remains a feature that distinguishes us from many other banking groups. Our CET1 capital reduced slightly in the past 6 months as the translation reserve decreased significantly due to the devaluation of currencies in our Eastern Europe segment. This devaluation also led to a parallel reduction in risk-weighted assets in euro terms. Our CET1 capital includes profits until quarter 4 2019, and we continue to subtract the anticipated dividend payment in relation to the 2019 consolidated results.Risk-weighted assets decreased due to various regulatory effects as well as negative FX effects. We will look at the regulatory effects in some more detail on the next slide. Because here, we see the CET1 development in greater granularity. The impact of the strong portfolio growth, which is net of FX -- which is net of FX effects of 0.7 percentage points on CET1, was partially offset by a reduction in excess liquidity.If we move on to the third effect, in June, as Gabriel already mentioned, the EU Parliament ratified various measures as a response to COVID-19. One of them is the introduction of new weighting factors for SME exposures, a measure that was originally scheduled for 2021. Given the short notice, we implemented these changes only partially as of now, leading to a risk-weighted asset reduction of EUR 140 million. We will fully implement these new factors in the course of the next 12 months, which, in isolation and not considering other effects, will lead to a further reduction in risk-weighted assets.The total impact of the EU measures, which also include the reduction of risk weight for euro-denominated central bank balances in non-euro countries within the European Union was 0.6 percentage points.The equivalent acknowledgment of Serbian banking regulation by the EU Commission in January, which we already elaborated on in our quarter 1 call, had an impact of around 0.3 percentage points coming from the reduction of risk weights on central bank balances.Lastly, we also see the effect of the currency devaluation on CET1 of 0.4 percentage points, which, however, is partially offset by the FX-driven reduction of risk-weighted assets that is implicit in the bars loan portfolio growth and liquidity assets and the -- on the left side of the CET1 walk.This concludes our assessment of the group's performance in this first half year 2020. On this note, I suggest that we move on to questions.
And the first question is from Milosz Papst, Edison.
Firstly, I understand that you do not provide a detailed guidance on the net interest margin. But I just wonder if you could comment on the near-term outlook. And in particular, to what extent do you think the impact of local rate cuts might be delayed in the second half or even further due to your interest rate hedges? I understand that the large share of your loan book in some countries where rates were cut significantly in local currency, particularly Ukraine and Romania. But I understand that the possibility to use interest rate derivatives in some local currencies is limited. But on the other hand, you also have meaningful exposure to those. I would appreciate a comment on that.Secondly, I wonder if you would be able to comment on the performance and profitability of the bank in Romania, especially in the context of the wage cuts. And finally, would you be able to roughly quantify the remaining impact from the new SME factors implementation on top of what you've already recognized in the first half?
Thank you, Milosz, for your questions. I will start with the first one and then gradually move on. Gabriel, if you feel that you want to add something, do feel free. So on the net interest margin, clearly, We've been observing the changes in the Eastern European base rates, particularly very closely. And this is something that we had already flagged in the previous call as of Q1.The reduction in our net interest margin can be largely attributed to this. As we mentioned during the presentation, we have had an impact of EUR 3.2 million, mostly -- just alone from cash and cash equivalents in the second quarter compared to the first quarter.The projections on the base rates available today, they state that rates should remain stable in the countries of our Eastern Europe segment going forward. This is particularly true for Ukraine, with the central bank just recently, I think end of July, reaffirmed the base rate of 6% and where inflation now is already above the national target of 5%.Notwithstanding, we expect further negative effects from the base rate reductions of the first half year in these countries due to a time lag effect. The average rate in half year 2 will naturally be below the average rate of the half year 1. And there will be some repricing of the loan portfolio.Still for 2021, we would again expect a broad stability of the margins, and this broad stability in the margins is something that we observed actually in most of our markets outside the Eastern Europe segment. So what we can say is, yes, there will be a negative -- still a negative time lag effect of net interest margin in the second half year. I wouldn't want to put a figure now on it.On the second question, the performance of the Romanian bank. You probably are aware of the result of the Romanian bank last year. It was a loss-making year for the bank. Since then, the performance is improving gradually. I must add that the loss of last year mostly comes from a lack of size of the loan portfolio. So what the bank has to achieve in order to turn the figures around is increase growth in the loan portfolio, and that is exactly what the bank is achieving also in this year.So also, the growth in the first half year in Romania was very satisfying. And also, the bank is attracting larger shares of site deposits as well as FlexSave, which will have a positive impact on the funding cost. So, so much for Romania, we would expect, especially in times of the pandemic and the increased credit risk, that the bank will post yet another loss for this year. But operationally, the performance is improving.On the third question, Milosz, could you repeat the third question for me?
Yes. Sure. I just wonder if you could just roughly quantify the remaining impact on your risk-weighted assets coming from the new SME factors implementation because you said that so far, with it partially so, I understand that you probably don't want to provide any details. But I just wonder if you can give us a rough indication.
Yes. It is, indeed, not quite straightforward to quantify. So as of now, we have had a positive impact of EUR 140 million on risk-weighted assets. What we expect until mid-next year, and this is really a roundabout figure, is another EUR 100 million to EUR 120 million.
The next question is from Andreas Markou, Berenberg.
And congrats on the results. My first question was actually on the margin, which was answered just now. So -- but I have 2 more questions. The first one is on the performance of Ecuador. So we see that the ROE is still negative for this segment. What's your expectation again here? Are you doing anything in terms of cost-cutting? We see that the cost-income ratio has also come down year-on-year. When would you expect to break even in Ecuador? That's the first one.And then on the fee income side, maybe if you can give us a bit more flavor about expectation for the second half of the year. I mean I know that things have been a bit better in June. But if you can give us a bit of -- a bit more detail, that would be great.
Let answer your first question referring to Ecuador. First, to be mentioned and as I mentioned during the presentation, Ecuador was -- is highly impacted by the COVID-19 development. It's one of the most impacted countries in our group should be made -- that's the context for the development. Beyond that, we are very encouraged in the results of Ecuador. As Christian mentioned, we are growing nicely in terms of business. We are growing nicely in terms of the new client type, one of them both growing institution. Margins are interesting.And indeed, before provision, therefore, was mentioned in the COVID-19 situation in this year, Ecuador has already a positive results before provisions. So if you like, before handling this situation, Ecuador has had already breakeven.Moving forward, we have to take a closer look at our cost of risk development, managing well. By the way, you also should be made some interesting growth in deposits with a new target client in reducing our cost of funds. So all in all, I have to say, we are on the way of breaking even now managing the situation as good as you can referring to the COVID-19 situation. We are confident reaching once the situations improve, having positive results in Ecuador.
And if I may add, Andreas, to the topic of, yes, reducing cost base. What is true for Ecuador is obviously also true for the entire group. In the last years, we have elaborated in great detail the reduction of our operational overhead and the restructuring measures that we went through. It is worth repeating that in the last 7 years, we reduced our branch network radically on a group level by 90%.And also in Ecuador, we closed down many, many branches and went, yes, fully digital. We have reduced staff significantly, 60% on a group level, and this figure is already adjusted for the banks that we sold, which means 60% is the figure that applies to the banks are -- that currently form the ProCredit Group. And we are fully digitalized front office. All of our clients perform transactions online. What this means is that there is really no further room to structurally reduce operating expenses.We expect structural operating expenses in Ecuador to remain broadly stable in the years to come, obviously, with some consideration for inflationary adjustments and wage increases. But the improvement in the performance on -- of Ecuador comes with the growth of the bank.And the bank is growing very nicely. Last year, the growth was 26%. For the half year, it was 11%. And with this growth, the underlying profitability year-on-year has improved. This is underlined by the cost-income ratio, which decreased by more than 20 percentage points year-on-year.So Ecuador will simply need to further build portfolio, which in times of the pandemic and increased credit risk costs is a more difficult task, but they are achieving it. The fact that the result is negative for the half year really is -- can be attributed solely to the increase in loan loss provision expenses, which is more than EUR 2 million. Without this increase, the result would have already been positive.On the fee income, yes, some color for fee income. We typically would structure fee income from 2 very broad sources. One is private individuals who typically pay fees for the accounts that they hold with our bank. That is usually a fixed monthly fee. And the second group is fees from transactions.Now the account maintenance fee income is relatively stable as client -- as our number of clients of private individual clients is actually now increasing since March, gradually month by month. But there was still a negative impact on account maintenance fee in March with the outbreak of the pandemic coming from one particular bank.So now this fee income from account maintenance fee was around EUR 5.4 million in 1 quarter. And here, we expect, I would say, broad stability with a possibility of a positive trend as client numbers are increasing.On the transactions in the second quarter, particularly in the month of April and May, transaction activity was clearly, clearly depressed; also in the month of March where we already posted a decline in fee income. This is really from reduced national as well as international trade. So these transactions compared to previous year levels reduced by around 30%. And in June, the -- compared to May, there was an increase of around 10% of the transaction level, which is encouraging and which we hope should continue. But even the June level of transactions was still below the level of June 2019.My very brief summary on this would be for Q3 to have a slight increase in net fee income, assuming that economic activity is picking up.
The next question is from Philipp Häßler, Pareto.
Philipp Häßler from Pareto. Three questions from my side. Firstly, on new business margins, do you see a positive trend there because you were mentioning reduced lending activities of competitor banks? Maybe you could comment on this.Then secondly, maybe you could share your thoughts on the dividend payment with us. The ECB has extended its ban to pay a dividend, but at the same time, there were comments that smaller banks could be allowed to pay a dividend. So maybe you could share your thoughts with us on this topic.And last but not least, asset quality looks still very good. Stage 3 loans only at 2.5% stable quarter-on-quarter. When do you expect to see this ratio going up? Will it be end of Q3? Or will it take even longer until end of Q4?
Let me begin, Philipp, with your question referring to dividends. Let me begin saying that from a capital perspective, with currently 14.1%, as mentioned, CET1, and leverage ratio of 10.3%. And our reasonable business and market outlook, we feel and are very confident to be able in the situation to pay out dividend this year.We have also expressed that the decision on the dividend distribution related to the profit of 2019 will be taken by the shareholder in quarter 4 this year based on our final assessment. Let me call it, in this way of the situation. Indeed, the topic includes -- it is a complex topic, includes, of course, the consideration of the regulatory recommendation of BBA and BaFin, which opens, as you mentioned, some possibilities of assessing the situation differently. What I can say is we are in the middle of those assessment, which may include talks to the regulatory authority. And again, let me reconfirm that the decision will be taken, as mentioned, in the quarter 4 of this year.
I will take your questions on the margins and asset quality, Philipp. The margins in the new loans that we disbursed in most of the countries, we are, indeed, able to price them more favorably than before. This is clear, and your observation is right, that lending activities of other banks are clearly reduced.On a consolidated level, however, you may not always immediately see this impact. There are a few banks, and I can highlight 2, which is Ecuador and Kosovo, which now, in times of the pandemic, are actually focusing much more on the upper medium segment. In this segment, rates are lower as compared to the small and lower small segment. And it is in these markets, specifically, these are local strategic decisions because our management in these countries, they simply feel more comfortable growing right now in these segments.So you -- yes, you have a positive effect in some banks from the current situation, being able to price loans at a higher rate on a consolidated level. However, you may not instantly see it, one, because you have a few banks that have a maybe negative portfolio effect, which, obviously, comes at the benefit of higher portfolio resilience and also the fact that the growth not -- is relatively small compared to the rest of the portfolio.On the asset quality indicators, yes, Stage 3, we do expect, well, let's say, in our guidance of 75 basis points. We budget in an increase in Stage 2 loans, first of all, and some increase in Stage 3, which we expect, which could happen in Q3 and could also maybe more pronounced happen in Q4.A short word on the increase in Stage 2 loans that we have seen so far. Not all Stage 2 loans are underperforming or are problematic loans. Stage 2 per se is not a portfolio quality indicator. We have many loans in Stage 2 that are simply in Stage 2 because in the context of the new assessment of credit risk, they now show an increase in credit risk compared to the last analysis that was done. But in simple terms, this could mean that an excellent client or formally excellent client is now only a good client. And because of this relative deterioration of his office credit risk profile, he would now find himself in Stage 2.So to give you a broad figure, around 40% of our Stage 2 portfolio is actually still performing quite well. Meaning clients are regularly repaying their loans. But this is what IFRS forces you to do when you identify a significant increase in credit risk.
This was 40% of your Stage 2 loans still perform well, you said?
Exactly. And for the rest, you would typically have more tangible indicators of underperformance, such as being late with 1 payment or, yes, I guess -- and you also have the restructuring there. But like I mentioned in the presentation, restructuring so far have been very minimal in the second quarter.
Let me add to it, Philipp, a short remark referring to this topic because, I guess, it's expressed very well the way we approach creditors in those times is what we call this intensified monitoring. Our credit analysts, well, that's the basis of all the appreciation and expectation Christian was mentioning. Our credit analysts are redoing the analysis of every exposure in our portfolio to assess the degree which this exposure are affected in the pandemic or not.The increasing Stage 2 Christian was speaking about is in our direct consequence of this granular work, thus, may give you confidence of our assessment. We are not analyzing simply top-down via sector, but every individual exposure is analyzed. We began prioritizing certain exposures. We are -- we identify sets with higher risk levels, and we are going through the whole portfolio. But that's -- it's the detail, but it's an important element, which may give you confidence that our expectation, including the 75% [ basis point ] are reason #1.
The next question is from Andreas Schäfer, Bankhaus Lampe.
So there's just one question left from my side. It's regarding your cost-income ratio and the guidance that's unchanged at 70% for this year. As far as I understand this that you expect a modest recovery of fees and a more stable development with the -- respect to the interest margin, and that combines with, I would say, further growth of loan book. Is it fair to assume that your cost-income ratio will be most likely be significantly below 70% this year?
Thank you, Andreas, for your question. Yes, we did model over this one, indeed, the cost-income ratio. We are aware that our guidance appears conservative in light of the improvement that we already see now and underlying profitability that can be clearly seen in both Q1 and Q2 figures. If our projection seems conservative, it is because that's what it is. In this projection, we budget for potential negative effects from the pandemic that are outside the scope of loan loss expenses and that are certainly out of our scope of control, in which, at this point, we cannot yet foresee. I would name one example, possibly the -- really the most relevant example, which could come from our annual goodwill impairment test. Our valuation model takes into account country risk, which in times of the pandemic is certainly heightened. So from an update of these country risk parameters, goodwill could be written down in some institutions.In this context, however, it is worth noting that our remaining goodwill is currently at only EUR 8 million, which is around 0.1% of our total balance sheet. And these EUR 8 million are already subtracted from our core capital. In line with CRR regulation, a goodwill write-down would, therefore, not impact our guidance for profit. We would certainly still be sure to post a positive profit nor would it affect our capital ratios.
And we have a follow-up question from Milosz Papst, Edison.
Yes. Yes, apologies. I have 2 additional questions with me. Firstly, I just wanted to understand the reasons why you are now guiding to a cost of risk of 75 basis points, which is I understand in the upper end of your previous guidance. I suspect that this -- I mean, you've already answered this question when answering one of the earlier ones. So I presume it might be due to the reassessment of the Stage 2 bucket. But I just want to understand whether that's correct.And secondly, you mean, of course, you've been able to grow your deposit base. I just wonder if you have any residual impact from the part of noncore clients following the migration to the digital platform. From one of the previous calls, I remember you said that the process was completed, and so I presume this is not the case. But in your report, I see that you've highlighted that the deposit base in pro forma declined slightly. So just wanted to understand whether there was any residual impact coming from the noncore clients with lower account balances.
I will take these questions, Milosz. So on the cost of risk, yes, you understood this right. What is budgeted in the 75 basis points, again, 75 basis points would correspond to risk costs in the second half year that are more or less on the level of the first half year. Here, we have mostly budgeted an additional increase in Stage 2 but also some increase in default.On the other question, no, we -- you understood this right, in the past that we have basically gone through the process of losing a lot of clients who would not be willingly accept online transaction as the only means of transacting. So since March, our number of clients or our net number of clients is increasing gradually and encouragingly. And we will start looking at a number of clients, maybe a little more closely in the next few calls.In terms of the deposit volume, what we have achieved in this year and especially in the second quarter, growth of more than 4%, this comes both from business clients as well as private individual clients.
And we haven't received any further questions at this point. So I hand back to the speakers for closing remarks.
Thank you. And thank you, all of you, for your interest and participation in our analyst call covering our second quarter results. We hope we have given you as much transparency as possible. If you have any additional questions, please do not hesitate to call Christian, Helen or Nadine whenever you feel like. The next scheduled conference call will take place when we publish our Q3 results on November 12, 2020.Thank you very much once again for your participation, and you have a good afternoon. Thank you.