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Welcome to everybody on this call on the 2020 third quarter results for the ProCredit group. My name is Gabriel Schor. I am a member of ProCredit Holding Management Board. Today, as usual, I'm joined by Christian, Christian Dagrosa, who will take you through the financial sectors of the 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 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 today the usual structure for today's calls. First, I will take you through the section covering the highlights of our third quarter results, main development. Christian will take you then through the details of what this means for our financial results, asset quality as well as developments in the group balance sheet and capital.In summary, I was thinking how to summarize the quarter. In summary, based on our quarter 3 results, what you will hear is a positive view of where the group stands today, both in terms of robust performance in light of the corona pandemic and in terms of strengthening our strategic position.As we look forward, this will inevitably be balanced by a sensibly cautious tone, you will hear, given the very dynamic pandemic situation, which we believe is justified. In the last quarter, we saw the macroeconomic environment in the countries in which we work to improve somewhat compared to quarter 2.In terms of our performance, we have been able to continue to grow our core business whilst managing credit risk costs in line or even slightly better than our expectation. Our quarter 3 profits is well up on our quarter 2 results, and our capital levels are also strong. We believe, all in all, this is a very good position to be in as we go through what may still be a difficult winter before we hopefully move towards a full macroeconomic recovery in our countries of operation in 2021.If we turn to Slide 2. This is a summary of where the ProCredit stands at the end of quarter 3. The social and economic context of quarter 3 has been more settled than the quarter 2, allowing us to further grow in our core SME private clients business areas, further strengthening our market position we believe. Quarter 3 saw good growth of 3% of our customer loans and very strong growth in deposits of 6.1%. Our year-to-date growth in loans of 8.5% is actually ahead of the growth in the same period on last year.Growth was mainly with existing and selected new target clients. And in quarter 3, basically, all of it was driven by investments and green loans. At the same time, we achieved solid financial results. For the 9-month period, profit was EUR 33.4 million, representing an annualized return on equity of 5.6%. Relative to the same period last year, our profit before provision and taxes was significantly up with net interest income up and operating expenses down, but of course, with a significant increase in cost of credit risk, driven by negative macroeconomic assumption as well as particularly now in quarter 3, a certain degree of stage transfers as we continue to assess clients, especially the clients most impacted by the pandemic.Very encouraging is that our profit in quarter 3 at EUR 11.7 million was well up on quarter 2. Net interest income was up by 3.7%, given strong loan growth and stable net interest margin at 2.9%, with stable trend for net interest margin visibly in the majority of our countries.Net fee income was up 13.6% relative to quarter 2, reflecting an increased international payment capacity -- activity and an increase in the number of private client accounts. Slightly lower-than-expected annualized cost of risk of 42 basis points, suggesting that the full year cost of risk could potentially be below our initial estimation of 75 basis points. Operating expenses were a little up on quarter 2, but the increased income base resulting in a reduction of the cost-to-income ratio compared to quarter 2. And at this stage, the year-to-date cost of income ratio of 66.5% remains quite below our full year guidance of 70%.Credit risk is clearly our foremost focus. We are encouraged that loan portfolio quality remains good with credit impaired loans even improving a little to 2.3%. At the same time, the coverage ratio has increased to 98.5%. Our business client advisers and credit risk teams maintain very close contact with all our clients, conducting risk-based comprehensive financial monitoring.As expected, quarter 3 has seen a certain transfer to stage 2 loans as we reassess the risk classification of clients, especially the most impacted by the pandemic. We will come back to cover credit risk in more detail. Liquidity levels are also comfortable, supported by good growth in deposits. Our deposits-to-loan ratio increased to 91%. Our capital position remains strong. Our CET1 ratio stands at 14.1%, significantly above our regulatory requirement.In quarter 3, our CET ratio has been stable despite the solid growth in the loan portfolio, the expected dividend payout from the 2019 and the first half year of 2020 group results, which is 1/3 of the group results, is already subtracted from our regulatory capital.You will have seen the announcement that given the general recommendation of regulators not to disburse dividends until at least January 1, 2021, we will not proposed to disburse dividend in 2020 based on 2019 profits.Having said that, given our commitment to investors, our strong and stable capital ratio as well our steady business performance, we do intend to propose a dividend to the AGM next year, which takes account of the lack of dividend this year. Of course, we will have to take into account prevailing regulator recommendation at that time.In summary, quarter 3 was a positive quarter. At this stage, it is still difficult to assess how the pandemic would take shape in and influence -- how it would influence our countries of operation over the next winter or over the next month.However, based on our quarter 3 results, we feel very well positioned and have all measures in place to respond as necessary. On Slide 3, our overall confidence for this year and beyond is reinforced by the fundamentals of our business model, which we have summarized on Slide 3 and which help us to manage the current challenging environment effectively as we believe.Our Hausbank for SME concept comes into its own, both from an impact and a business performing perspective. We have been impressed with how our staff and our clients have adjusted to the challenges of working under pandemic condition. I really do feel that the quality of our staff and our clients, they make the difference in these days. We are very encouraged that we continue to grow so strongly, particularly in investment and green loans. It is clear that even in difficult times, there are some SMEs that are investing and expanding, and they need a good bank to help them to do so.Of course, complementary to helping some clients to grow is ensuring we manage the credit risk of others. Our staff remained very close to our clients, particularly those experiencing difficulties as a result of the pandemic. We have seen an increase in stage 2 loans as a result, and we work actively with these clients to ensure as fast as possible problems do not compound.Quarter 3 saw further strengthening of our important green loan portfolio, particularly in the area of renewable energy. As an example, via our Bulgarian bank, we are involved in financing an innovative photovoltaic project complex in Greece. This involved the so-called energy communities, which comprise agricultural firms and private individuals constructing altogether photovoltaic parks. This is an expanding model for renewable energy development in our countries.And please bear in mind that our renewable energy portfolio has the highest loan portfolio quality in our portfolio. In terms of strengthening our market position, the strong growth in deposits and sight deposits have been notable in quarter 3. Our very efficient branch structure and a digital model for all routine transactions remains key and remains a key strength of our model. We have seen good development in the number of target private client in most ProCredit banks. Strengthening our market position on the one hand, while taking a very prudent approach to credit risk has always been a hallmark of ProCredit.The level of loan portfolio under moratorium came down further in quarter 3, such that quarter 3 [indiscernible] quarter 3, it represents only 12% of the total portfolio and less than 5% as of 1st of October. We still have a relatively low and manageable exposure to high-risk sectors such as HORECA of some 3%.All in all, our business model continues to provide a solid basis for continued growth and prudent risk management, which brings me to Slide 4. This provides an overview of the current market environment in our countries of operation. Compared to quarter 2, quarter 3 was a relatively steady quarter. Lockdown measures were lifted in most countries in June, and there was more kind of a normal economic activity in quarter 3.Industrial production indices for quarter 3 indicates some of macroeconomic recovery in quarter 3. Yet, output remains subdued with respect to 2019. All of our countries of operation have been more or less strongly affected by the pandemic.Looking to the full year, the situation remains very dynamic. Recently, there has been an increase in infection rates in most countries, resulting in local, tighter lockdown measures, but it is still unclear what form any so-called second wave of the pandemic may take. Therefore, the full macroeconomic impact still remains difficult to assess. The bottom left of this page shows the latest IMF GDP assumption for our Eastern Europe countries of operation. And there is a slightly more negative macroeconomic view on this year compared to the last forecast of April, while the strong recovery expected for 2021 is almost unchanged.Slide 5 provides a little more detail on key credit risk indicators that I have already mentioned. To start with the portfolio in moratorium. As mentioned, the share of loan portfolio under moratorium fell to 12% at the end of September and further to below 5% or EUR 250 million as of October 1 as the moratoria in Serbia expired. As mentioned, HORECA accounts for only 3% of the group portfolio.Quarter 3 saw an increase in stage 2 portfolio to 6.6%, in line with expectations. The stage 3 portfolio remained steady. Coverage is a strong 98.5%. Provision expenses are also broadly in line with our expectations. Quarter 3 saw an increase in provisioning related to stage 2 transfers. The total year-to-date provision cost of EUR 21.1 million, which corresponds to a cost of risk of 56 basis points and the waterfall at the bottom of the slide shows that most of this is accounted for by provisions on stage transfers and about 38% accounted for by macroeconomic assumptions.There was no further update of macro assumption in quarter 3 as the new IMF forecast that has been published in October will be factored into our quarter 4 provisions. There has been recoveries worth of some EUR 7.4 million year-to-date. 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 sector in our countries.However, depending on exactly how December will develop in terms of the infection rates and the extent of the lockdown responses, we see good chance that the cost of risk of the year would be below our initial guidance of 75 basis points. On Slide 6, you can see the growth in our customer loan portfolio. We grew by a good EUR 153 million in the third quarter. Growth was particularly focused in South Eastern Europe and South America.The underlying growth in our Eastern European region was negatively impacted by weakening local currencies. Notable is that growth has not just been in short-term working capital loans, but above all, in longer-term investment and green loans, as mentioned. This growth come from both existing and selectively also new clients, reflecting a certain confidence from SME and the effectiveness of our very targeted 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 continue to further strengthen our market position with target SMEs. The green loan portfolio grew by a strong 9.1% in quarter 3, continuing the strong performance of quarter 2. Year-to-date growth of green loans represent 39% of the group's total loan portfolio growth, meaning good progress towards achieving our midterm target of having 20% of our loan portfolio in green loans.You will remember again that this portfolio enjoys very high portfolio quality. The default rate of the green loan portfolio is only 0.3%. Strategically, we also see strong and attractive growth opportunities here, particularly in renewable energy. Turning to Slide 7. You see that strong growth in loan portfolio over the year has been complemented by strong growth in deposits. Year-on-year deposit volume has increased by 14%. In quarter 3 alone, we increased by 6.1%. This has allowed our deposit-to-loan ratio to increase to 91%. At the same time, the share of deposits account for sight and FlexSave account has increased to 67.5%.This is strategically important, not only because it helps to reduce cost of funds but because it reflects that we are building relationship with target clients, which actively use their account with us. This means local clients and a base to improve fee income. Quarter 3 saw steady growth in the number of private clients in contrast to prior periods where we were still actively reducing the number of non-core clients. We believe this success highlights the growing appeal of our digital approach, particularly in the pandemic context.Certainly, it has been a huge benefit to have had virtually no disruption to regular business activities since basically all our clients were already using online and mobile services as well as cards for all their transactions.Slide 8 summarizes where the group stands year-to-date relative to our 2020 guidance. In terms of loan portfolio growth, we are in line with our guidance of 8% to 10% growth over the year. It is clear that given we are at 8.5% as of quarter 3, it is likely that we will end the year rather at the upper end of this guidance.We have achieved a steady 5.6% return on equity, which is in line with our guidance for the full year. Our cost-income ratio stands at good 66.5%, which indicates the improved underlying operational profitability of the group compared to 2019. Here, again, although we do anticipate some extraordinary items in quarter 4, our cost-income ratio is likely to be slightly below the guidance of 70%.On CET1, we confirm that we will end up comfortably above the guidance for the year of above 13%. On dividends, we continue to accrue 1/3 of consolidated profits and have reflected the first half year profits and dividend accrual in our regulatory capital in line with our dividend policy. Midterm, we remain confident in the prospects of our markets and for group performance. And with this, let me hand over to Christian to cover the financial aspect of the results in more detail.
Thank you, Gabriel, and good afternoon to everyone now also from my side. As usual at this stage of our presentation, we will spend the next part looking more closely at the financial performance of the group, going through all the relevant captions and the key figures. Let us start with the year-on-year view.Our net interest income continues to show a good increase compared to the previous year, EUR 7.1 million or 4.9% compared to 2019 in spite of the negative pricing effects from base rate cuts that we have seen this year, particularly in the second quarter of 2020. Our provisions increased significantly from EUR 2.4 million in 2019 to now EUR 21.1 million. This is obvious. In this EUR 18.7 million increase, we see that the deterioration of the overall macroeconomic outlook reflected due to which the average expected loss in our portfolio increased. And also provisions come from stage transfers, particularly from stage 1 into stage 2, which are foremost a result from our client assessment during the pandemic as well as some restructurings.Net fee income came down by EUR 4.2 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 net result of other operating income was only slightly improved with respect to the previous year and operating expenses are down by EUR 1 million or 0.8% in spite of higher staff numbers.Though the travel restrictions have had a positive effect on our operational overhead, certainly, in terms of traveling expenses, 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 bottom line, the net profit of EUR 33.4 million was EUR 10.6 million below the previous year and corresponds to an annualized return on equity of 5.6%. In times of the pandemic and the increased cost of risk, we consider it as a good result that underscores the solidity of the business model and the resilience of our loan portfolio, also in times of macroeconomic stress.The cost-income ratio improved from almost 68.4% last year to 66.5%, reflecting the higher underlying profitability we can show for today. We can now move on to the quarter-by-quarter details of the most relevant P&L items, starting on Slide 11.Like I said, the net interest income shows a positive year-on-year trend with almost 5% growth. On this slide, we see the quarter-on-quarter trend is also positive after the reduction that we saw from quarter 1 to quarter 2, which was driven by the aforementioned negative margin effect. We now see an increase in the third quarter of EUR 1.8 million or 3.7%, lifting our net interest income back up to pre-pandemic levels. This increase was basically driven by all our banks with the exception of Ukraine, where base rate cuts were more substantial than in other markets. On a consolidated level, the net interest income was at EUR 50.8 million in quarter 3, with a net interest margin stable at 2.9%.The year-on-year increase in net interest income is driven by both higher interest income and lower interest expenses. The positive trend in interest expenses, particularly is in 1 part, obviously, linked to the decreasing interest rate levels that we've seen in our countries. But another part, it is also driven by our steady increasing share in sight deposits, which Gabriel already pointed out earlier.Moving on to Slide 12. The provisioning expenses in quarter 3 were at EUR 5.4 million, which corresponds to an annualized cost of risk of 42 basis points. In this quarter, Gabriel has also mentioned this, we have not yet performed an update of the macroeconomic assumptions with the last available IMF figures, which were only published in mid-October. These forecasts will affect our Q4 figures. The Q3 provisioning expenses were, in turn, primarily driven by stage transfers, particularly from stage 1 into stage 2, which is a result from the ongoing client assessment as well as restructurings, which somewhat picked up a little in quarter 3 but remain at an overall low level.We will see later that our stage 2 loan portfolio increased visibly since the beginning of the year, while our default portfolio, on the other hand, remains at a relatively low level of 2.3%. Moving on. Our Q3 net fee income increased visibly with respect to the second quarter by EUR 1.5 million or 14%. This reflects, of course, in large, the recovery of transaction numbers in the third quarter as money transfers were visibly depressed in the second quarter due to lockdown measures and trade restrictions.And overall, the level of transactions, one must say, has yet not reached the levels of 2019. Income from account maintenance fee increased slightly quarter-on-quarter to now EUR 5.7 million, previously EUR 5.6 million. On Slide 14, we can follow the development of our cost base. In quarter 3, we saw an increase in administrative expenses, which was driven by smaller, nonrecurring items and stable personnel expenses. It should be noted at this point, that the impact of the pandemic on our lending and branch operations has thus far been very limited even though the infection numbers, as Gabriel described, have increased in the past weeks. We have not taken advantage of any short time working model for our employees and even selectively increased staff since the beginning of the year. Year-on-year, operating expenses decreased by EUR 1 million or 0.8%, which comes primarily from lower traveling and marketing expenses.The year-to-date cost-income ratio is almost 2 percentage points below the level of September 2019. The improved pre-provision income that is up some EUR 4.6 million and a slightly reduced cost base further emphasize the improvement in the underlying financials. Compared to quarter 2, the cost-income ratio also improved by 1.8 percentage points to 66.7%. As a reminder, quarter 2 was affected by the annually recurring onetime expense related to the Bulgarian deposit insurance scheme of around EUR 3.5 million. In this third quarter of 2020, on the other hand, we see minor write-downs of fixed assets of around EUR 1 million reflected. These assets were projected to be disposed at book value at the beginning of the year before the pandemic spread.We expect administrative expenses to be impacted by extraordinary items in Q4. As Gabriel already mentioned, these extraordinary items are mainly related to a write-off of goodwill as well as restructuring costs in our bank in Romania, which include, for example, rent termination of branches, severance payment and accelerated asset write-down.The write-down of goodwill is related to the deterioration of certain market parameters in this pandemic year. These parameters are essential to the fair value model. Overall, we estimate a mid-single-digit million amount for these topics in total. And let me make 1 comment on Romania.We have undertaken restructuring measures already last year. The pandemic has not hit our bank, particularly harder than others, but it certainly has prolonged the recovery that we had originally envisaged for this bank. And we believe that the measures that we're taking now and it will be reflected in our Q4 figures will speed up the process of improving underlying profitability of this bank going forward.Let's take a quick look at the contribution of the individual segments to the year-to-date group results. In Southeastern Europe, you know we have our 7 banks in and around the periphery of the EU zone. Here, we achieved a strong growth of 11.4%. Please note that these growth figures are not annualized as well as an improved cost-income ratio of 66.2%, driven by increased net interest income and a slightly reduced cost base.The segment contributed EUR 24.5 million to the consolidated result. In Eastern Europe, our portfolio basically did not move as strong currency effects negatively impacted the solid underlying business driven growth of our 3 banks there. Worth highlighting is, nonetheless, the very strong growth in our Moldovan Bank of 17%. The annualized year-to-date net interest margin in the segment reduced by 30 basis points to 4.2% and remained stable since the second quarter. The cost-income ratio remained on a good level of 2019 at around 42%, and the return on equity came down to 12.6%, driven mostly by the higher provisions.South America, Ecuador, if you like, remains our smallest but yet fastest-growing segment. In the first 9 months, our Ecuadorian bank continued to grow strongly this time by 11.5%, and thus increased net interest income year-on-year by 13%, which resulted in a 15 basis point improvement in the bank's cost-income ratio.The year-to-date loss that you see posted here of EUR 2.3 million comes from an increase in provisions of EUR 4.2 million relative to the last year, which resulted obviously from the more subdued macroeconomic environment in the country as well as the ongoing restructurings that are also a result of the pandemic. 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 payments, clearing and liquidity support functions.The ProCredit Academy remains temporarily closed due to the pandemic. Let us now move to the chapter asset quality 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, as well as industry sector. On the left pie chart, you see the high geographic diversification with only 4 banks accounting for 10% or more of the portfolio.And on the right, you see that 94% of our loan portfolio is accounted for by business loans, 99% by business and housing loans to private individuals combined. That means we do not engage in any meaningful consumer lending, which in light of the pandemic, we consider a distinct advantage. Of our overall loan portfolio, this you see on the right-hand chart, 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, especially in these times, are strongly represented in our loan portfolio.On Slide 18, we see that loan portfolio quality remains good in spite of the macroeconomic headwind. The default portfolio reduced slightly to 2.3%, at the same time, the coverage ratio increased to almost 99% due to the additional portfolio provisions resulting from the update of macroeconomic parameters as well as stage 2 provisions.Our stage 2 portfolio increased in the third quarter to a share of 6.6%, which reflects a 1.3 percentage point increase quarter-on-quarter and a 3.2 percentage points increase year-to-date. We have already stressed how our banks are assessing the impact of the pandemic on each loan exposure in our loan portfolio. Exposures that show a visible increase in default risks are transferred into stage 2, which also includes all restructurings. Though restructurings have not been performed on a large-scale as of yet, there has been a certain increase in Q3 relative to what we would normally observe. But let me again repeat, and we have stressed this in our last Q&A session in summer, not all loans in stage 2 are underperforming.A large share of stage 2 consists of loans that simply show a default risk that is higher relative to the default risk at their origination. Moving on, I think you are used to the slide by now. And obviously, it is more relevant today than ever before. You can see that the large part of our collateral consists of mortgages. An additional 15% is accounted for by cash and high-quality financial guarantees, which mainly result from the InnovFin initiatives and other guarantee programs provided by the European Investment Fund.In this graph, we do not include any state guarantee schemes nor are they 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% form the largest part of our group portfolio. Short-term working capital loans can be granted without capital, but they are typically only provided to clients who have had a long business relationship with us and whose businesses we know inside out.Working capital loans formed a much smaller part of our loan portfolio, as Gabriel showed us earlier, and they have not shown a particular growth in the third quarter. For the valuation of collateral, we rely on specialist staff, external expert appraisals as well as regular monitoring.At this point, let me conclude our presentation, moving to Slide 20 by summarizing the simple balance sheet, capital and funding structure of the group and by showing the development of our CET1 ratio in the third quarter.Slide 21 shows our simple and stable asset structure and its development over the course of the last 9 months. The increase in total assets, as you can see, is driven primarily by the growth in the loan portfolio, along with some increase in cash and cash equivalents. The increase in liabilities is above all driven by customer deposits, most notably sight deposits. Other financing also increased, though clearly less pronounced.The reduction in equity that we see here of EUR 18 million is primarily driven by negative FX effects as well as the purchase of minority shares in ProCredit Bank Ukraine earlier in January. Both these effects have offset the effect of increased retained earnings. Slide 23, 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 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 the holding company. As of September, our CET1 ratio continues to remain stable with respect to the year-end 2019 at 14.1%. Our core capital reduced slightly in the past 9 months, driven primarily by the devaluation of currencies in our Eastern Europe segment and its impact on our translation reserves.However, this valuation also led to a reduction in risk-weighted assets. We now also consider the group's profits, as of June 20, in our core capital and continue to subtract 1/3 of the 2019 year-end result and now also 1/3 of the 2020 half year result for dividend purposes, a total of EUR 25 million or close to 50 basis points of our CET1 ratio.Risk-weighted assets decreased due to various regulatory effects as well as negative FX effects. Though the regulatory effects are the same ones that we already explained in our previous call, we'll look at them briefly in more detail on the next slide. The leverage ratio of 9.8% remains a feature that distinguishes us from many other banking groups who account for substantially lower ratios. We are already on Slide 24, where we see the various effects on our CET1 ratio, the impact of the strong portfolio growth, net of FX effects of 0.8 percentage points on CET1 was partially offset by a reduction in excess liquidity, which was available at year-end 2019.In June, this we already touched on in the last call, the EU parliament ratified various measures as a response to COVID-19. One of them is the introduction of new weighting factor for SME exposure, a measure that was originally scheduled for 2021. We implemented these changes only partially as of now, leading to a risk-weighted asset reduction of EUR 140 million. So no change here with respect to quarter 2.We will fully implement these 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 includes a reduction of risk weights for euro-denominated central bank balances in non-euro countries within the European Union was 0.6 percentage points. In our last Q&A session, we estimated an additional positive impact from the full introduction of the SME factor of some EUR 100 million, that figure is obviously still valid.The equivalent acknowledgment of Serbian Banking regulation by the EU Commission in January. This is also nothing new for you. This had an impact of around 0.3 percentage points coming from the reduction of risk weights on central bank balances we hold in Serbia. And lastly, we also see the effect of recognizing the half year profit of core capital. Again, only 2/3 of this result is recognized. The rest is set aside for dividend purposes.All right. And this concludes our assessment of our group's performance in the first 9 months of 2020. And on this note, I suggest we move on to the Q&A session.
Our first question is from Andreas Markou, Berenberg.
Congrats on the results. So 2 of them. The first 1 is on the rising COVID risks that we've seen in the past couple of weeks. It's a probably a bit difficult to ask you to kind of forecast what the situation might be in the next couple of months or semesters. But is there any more -- is there any visibility you have into Q4 regarding -- I mean given the situation and how it's playing out in Europe? So that's the first one. And the second one is on the performance on Ecuador. So you mentioned that effectively, ROE was lower compared to the 9 months last year due to increase in provisioning expense and also restructuring costs. So what would have been a normalized ROE for the 9 months for this year. So can we stirp out any one-off kind of restructuring costs to understand the underlying performance?
Let me take your first question, which is not an easy one. As you already mentioned, it's very difficult to speculate together what would happen in terms of COVID [ and what happened ] Therefore, we could say, expect what you can feel and hear from our side. We do expect and we will serve the situation very closely. We did see already an increase in infection rates in our country, which we are taking it seriously.But again, based on what we saw in quarter 3, that's our message, by the way, our way of being close to our clients and observing together how the situation developed, that allow us to give intelligent answer to the situation and difficulties of our client. So what I can simply say relating to our performance in quarter 3, being close to our client, knowing them, knowing the situation and mentioning again that they are high-risk sector. But one have to take a look on the individual development of our client structure. What we do see that would say, let me say, HORECA is not HORECA. There are some high-risk clients in the hotels [indiscernible] pandemic will suffer a lot.We do have some small hotels who are reacting intelligently and adapting to the new situation. Therefore, perspective of what would happen in COVID, I can't tell you. What I can simply make sure is based on what we showed in quarter 3, being close to our clients, having a very structural sound basis how to react to it that let us feel very well prepared for the times to come. Nevertheless, we do expect to be in concrete higher cost of risk in quarter 4, which may also reflect the consideration, the macroeconomic impact, which we are going to take in consideration that should happen. And we're observing situation closely without [ idolizing ] on simplifying answers.
And then let me take the second question, Andreas. So first of all, let me clarify on the restructurings. I used that word, but what I was referring to was actually restructuring exposures as a result of the pandemic.So we've had, yes, especially in Ecuador, many clients that were affected by the pandemic, leading us to restructure these exposures, thus increasing the credit risk costs. And clearly, Ecuador is among the countries within our ProCredit universe that is most affected by the pandemic. Last year, we projected this bank to be profitable in 2020. And this projection was a relatively easy one. It was based on really continued portfolio growth, broad margin stability and steady operating and risk costs.Our growth has been good in this year, more than 11%. This was in line with our expectations in spite of some negative FX effects in the third quarter from the devaluation of the U.S. dollar. Our operating expenses are broadly stable. They were up EUR 400,000, which was more than offset by the EUR 1.6 million increase that we've seen in net interest income. So all of these developments are reflected in a much improved cost-income ratio of 93%, which is down more than 15 percentage points compared to the previous year. Now the bank's result today is negative, not because of restructuring measures. We have not taken any, but simply because of the much elevated risk costs. Our result deteriorated by EUR 1.7 million with respect to 2019 and the increase in loan loss provision expenses with respect to last year was EUR 4.2 million. Like I said, Ecuador was and continues to be heavily affected by the pandemic and the increase in provisions at ProCredit Ecuador was the highest amongst all of our banks in relative terms.And still given the severity of the situation, our bank is managing the crisis relatively well. So as for a normalized ROE to really get to your question, we would have really expected the bank to be positive, to have a positive result, somewhere in the -- between EUR 500,000 around this area if the pandemic had not hit. And this figure would have already accounted for some increase in loan loss provisions because last year, clearly, they were very low.
Okay. That's very clear, Christian. And maybe just on Ecuador again. So given the current situation, I guess, would you expect to be in a positive territory sometime in '22? Or do you expect even this to happen, let's say, Q4 '21?
We do expect, indeed, based on the explanation Christian gave. End of '21 to have positive results, the latest in '22 with the justification of it. If you see our result, our cost-income ratio had a reduction this year, net of provisions, which would lead us to positive results already this year. This structural program would continue. We are growing nicely in Ecuador. Our cost basis is fixed, as Christian mentioned. There's no reason under a normalized situation. Let's see how it would develop next year.Again, COVID, COVID Ecuador, without repeating our answer, let's see that's the only open question. Structurally, it's a growing bank, a bank and our losses this year, they're simply justified by the increased provisions because of COVID. Taking it in consideration on if the next year develops as foreseen with some recovery, don't forget GDP reduction is foreseen in Ecuador for this year of 11% and next year an increase so forth. If everything develops as foreseen based on what we do now, we do see a breakeven at the end of next year and surely, at the beginning of '22.
Our next question is from Milosz Papst, Edison.
Obviously, you've already flagged, it's very difficult to predict how Q4 would look like given the reintroduction of the lockdown measures. But I just wonder if you're able to comment on your loan book performance after the moratoria expires, including what you've seen so far in Q4, given that we are halfway through. I mean of course, I understand this performance is already partially factored in Q3 results, but some of the moratoria expired towards the end of the quarter. I mean has the performance of those loans which without moratoria being generally in line with our expectations and reflecting loss allowances. And at least based on that, do you expect an increase in risk-free loans in Q4 or Q1 2021?And then my second question would be on your kind approach to client visits, given the resurgence of COVID cases. How may it impact your visibility in terms of credit quality of the portfolio and the ongoing restructuring processes you have?
Thank you, Milosz, for the question. So I'm going to start with the first one, the loan book performance in Q4. Obviously, it is always difficult to look forward. But let's start with the moratoria that you mentioned, the ones that expired in Q3 and that basically, this is the difference between the 12% that Gabriel mentioned and the 5% on October 1, the expiration of moratoria.The difference comes mostly from Serbia. You know that Serbia, in our universe was the only country that had an opt-out moratoria, meaning that clients had to request explicitly not to be in moratorium, which is why we think that the large part of these 7 percentage point difference are actual clients that do not have big problems. And this is what we have also -- this is what a client assessment that we have performed has also shown. For the fourth quarter, what we expect on -- in terms of credit risk. So we have indicated 75 basis points of cost of risk for the full year. And currently, we stand at an annualized 56 basis points.We have and still are reviewing our entire client portfolio very carefully on an individual exposure basis. And therefore, we feel to be in a relatively good position to anticipate as much as possible within this year. For the fourth quarter, we do not expect major underlying onetime effects with respect to ending moratoria.What we will reflect in Q4 will be the change in the macroeconomic parameters resulting from the latest IMF update, which is slightly worse for our countries than the previous one, which was from April. But if you ask me a ballpark number or direction, I think Q4 risk costs will likely be higher than in the third quarter, perhaps around the level of quarter 2, plus/minus. So taking this into account and given where we are today, could well be, as Gabriel already said, that the cost of risk at year-end might up slightly below our initial 75 basis point indication. What will drive credit risk costs in quarter 4 will likely not be default.We just don't see it as of yet, really. This is always the caveat that we have a limited visibility. But the visibility for year-end, the feedback that we get from our credit risk departments in our banks is that we will not see a substantial increase in default until year-end. The major driver behind risk costs will be stage transfers into stage 2 as it has been in quarter 3.
That's very helpful. Obviously, I assume this is the case, but I just remember that initially, like 6 months ago, the assumption was that stage 3 loans might pick up in the fourth quarter. But as you say, it's more likely that stage 2 is the greater contributor to cost of risk, I understand.
Indeed, yes, this is the observation that we're making. We're not done with the process of reevaluating the portfolio. The difference to quarter 3 is maybe somewhat in quarter 3 we saw an uptick in restructurings -- in the restructured portfolio. This was mostly focused on Ecuador. In Q4, we don't expect restructurings to continue at the same pace, but there will be continued stage transfers, simply from the IFRS concept of significant increase in credit risk triggering stage transfer.
And I do sound like repeating what you said, Christian, the macroeconomic impact of including the new forecast in our model that would happen in quarter 4. But indeed as a ball curve, I would say, we can say it's going to be higher than quarter 3, but not as low just to justify as of now better return on equity results.Let be cautious. What you hear all of you is this piece of caution, we would like based on experience, say, just observing how things developed, but you mentioned we were expecting or some were expecting stage 3 increase and not stage 2, just observing how it's developed, that's exactly the experience. In this kind of crisis, we have to observe very closely how clients react and they are very dynamic. Therefore, observing it closely does express this element of caution, what we are not avoiding, expressing what we do expect, just expressing this piece of caution is justified by the way things developed.
Okay. And on my second question, I mean, do you -- what's your approach to client visits in the current environment? And would you -- I mean do you plan to do anything differently in case, well, hard lockdown measures introduced in comparison to how you approach the situation during the first wave?
Yes, indeed. I mean this year has been obviously a learning experience for not only for us, I guess, for everyone. We have to adapt certain processes, but still the -- yes, we have learned what the lockdown measures mean for us operationally. We have managed to -- yes, some of these processes to do them virtually. In some other cases, our client advisers can still visit the premises of our clients if it's necessary and under all precautionary measures.
Our next question is from Philipp Häßler, Pareto.
Philipp Häßler from Pareto. I have 3 questions, please. Firstly, on your dividend policy for next year. Have I understood you correctly that you would be willing to pay out next year, 1/3 of the 2019 profit and 1/3 of the 2020 profit, if the regulator would allow you to do so? Then secondly, on the NII outlook for Q4, is it realistic to assume that Q3 is a good run rate? And maybe you could also give some indication what you expect for 2021? Do you expect the net interest margin to be stable for the next year? And last but not least, could you perhaps comment on the competitive situation in your most important countries, i.e., Bulgaria, Serbia, Kosovo and Ukraine?
Referring to your first question, Philipp, yes, you understood it absolutely correctly. That's exactly what is our intention to present this proposal to the general assembly in May 2021.Always, as you already mentioned, taking into account the prevailing recommendation of the authorities, but it's exactly we do and we are committed to our dividend policy. And I think our capital adequacy, and together with the business development as we are discussing it today, justifying this proposal. That's exactly what we proposed on this, something which was discussed and confirmed with our supervisory board.
Good. Then I will take the second question on the net interest income and the net interest margin. So I think it was important for us to see that the margins stabilized in quarter 3. This was our expectation after the pronounced drop of base rates in quarter 2. But it was certainly reassuring to see the stable net interest margin in the third quarter and the quarter-on-quarter increase in net interest income of almost 4% or EUR 1.8 million.Going forward, we feel comfortable with the trends that we're observing now. That should enable us to maintain the margin stable for the foreseeable future. Now coming back to the topic of visibility. But that is clearly until year-end and also until the beginning of next year, we do consider some continued repricing of our loan book, especially in the margins where there was a more pronounced drop in base rates, including Ukraine, of course. And this will or might reduce interest income in some of these banks.We are confident that this may be offset to a large extent by increases in markets where net interest income and net interest margin is stable, and that includes most of our countries in the Balkans. In addition, at this point, we think that most of the additional repricing on the asset side can be absorbed by repricing on the liability side. So in short, for Q4, our expectation is a stable margin. And therefore, at least a stable net interest income with potential for minor increase.I think it's also worth noting, unlike in previous years, we were divesting -- when we were divesting from higher margin, very small lending businesses. We currently do not see any material portfolio effect on our loan book. The decline that we're seeing -- that we saw in the second quarter is really entirely attributable to base rates. For 2021, I think for our key markets, such as Ukraine, which is obviously a driver of net interest income being a high-margin country and also Ecuador, we currently do not see that base rates will go down further. That perhaps also due with the level of inflation that you're currently seeing, which is close or already above target rates of these governments. So the sense for now is broad margin stability. However, as I mentioned, with some continued repricing on the loan book in the next months and quarters. If that answers your question, Philipp, I would move to the next question.
Yes.
On the competitive situation in our most important markets, I think the essence of our Q2 call on -- in terms of competitors and in terms of growth was that we had observed that many banks were reluctant to lend, and this created some opportunity for us, some opportunity for growth. I think in the third quarter, we see a turnaround, a little situation, that there is a more pronounced hunger of other banks. They have also now managed to grow their loan book in the markets, particularly that you mentioned. I think here and there, we see more pronounced increases in default of other banks that goes particularly for the markets, Ukraine and Bulgaria. So I think the competition has tightened up, again, especially with respect to quarter 2.
Our next question is from [ Thomas Reka, KFW ].
And congratulations to these really very good numbers. It seems like the digitalization strategy really proved to be successful right now. My questions go to the aspect of the loan quality, the asset qualities you have there. You mentioned that governmental, mostly governmental guarantee schemes are not included in the graph on page -- what was it, 17, I think. For first question, why is this? And to what extent does ProCredit use these governmental guarantee schemes? And the second question is towards -- you did not distinguished, you never distinguished in your slides, in your quarterly calls between investment loans and working capital loans. But all these days, I questioned this, is there a shift from investment loans to operating loans, so working capital loans, sorry, and to see that if there's a form of repayment scheme, repaying 1 loan by taking on another loan. This kind of prolonging and which could result, again, in a very -- well, in losses after the chain moves into the end?
Let me begin with the second answer or the second question, sorry. No, there is no shifts in strategy just to concentrate and vis-à-vis first having a client approach, we analyze what are the needs, the financial needs of client and based on what is needed, we react. Why we did mention investment loans in the development of the quarter 3, which was the case also in quarter 2, was specifically related to the situation of the COVID.One could expect in a situation of crisis, yes, one could grow, but one grows simply with bridge loans, just to give answers to the actual and immediate situation.What we wanted to mention, it's always was our strategy to put strong focus in investment on growth enterprises, but especially in the COVID situation, finding enterprises who are ready, when it is justified on granting investment loans and that is the issue, which we wanted to reinforce, no shifts. We have an approach vis-à-vis enterprise with granting investment loans and short-term loans. The focus in investment loans put focus in the characteristics and the profile of our core clients. We are looking for innovating clients where normally innovations, they are related with investments loans to grow. Therefore, the focus remains as it was the same. It is simply remarkable and interesting to mention it in the context of COVID or the crisis situation.
So that means you don't have any increase in working capital loans and still, we see the portfolio growth is still [indiscernible] investing in the crisis -- in terms of crisis. That's just pretty astonishing.
I think if you look at our portfolio growth and the growth in investment loans and combine this or look this also in the context of the increase in stage 2, looking at these 2 items, it gives you the picture of what is happening on a client level. And that is the crisis creates -- the crisis poses a challenge to many of our clients. We do see the deterioration of many of our -- of the businesses of our clients on the one hand.And on the other hand, the crisis also offers opportunities to other businesses. And this is especially in the area where we are most active or we are only active in SME, particularly true where we see that our clients tend to be more flexible, more agile and sometimes even surprisingly, diversified in their business lines to respond to opportunities that arise also in times of crisis.
Okay. That's the end of the question.
And then on the -- on your first question, the governmental schemes, yes, we do not consider them because in broad, they tend to be very complex and not always overly transparent. And then I don't want to say they're not reliable, but because of this complexity and to see what applies and what applies not and to take a conservative approach in our provisioning, we simply do not take account of them.
Is this topic of regulatory issues like the guarantee conditions like days until first payment when drawn, these kind of things? Or is it more in ProCredit internal approach to be conservative?
Yes. The second answer you gave is the right one. It's for credit [indiscernible] because of, again, conservative [indiscernible] risk is not taken in considerations guarantees, which we are not sure how they would work. We prefer not to consider it in our credit decision.
Our next question is from Milosz Papst, Edison.
I have 2 follow-up questions. One, I noticed that your personnel expenses remained stable in Q3. And what is -- if you continue to expand your headcount during the quarter? And what's your plan with this respect going forward? And the second question would be on your employee training activity. How does it look like currently after the first COVID wave? I mean have you reintroduced traveling to your ProCredit Academy? Have you introduced remote training opportunities?
Yes. Thank you, Milosz. Sorry, the personnel expenses, yes, they have remained stable in Q3. Year-on-year, we see this increase of EUR 3 million, which is really driven by higher staff numbers mostly. We have increased in this year of the pandemic, some 200 to our staff count. This was budgeted, this was planned for.If anything, it describes or it shows a little just how normal business has been -- has continued in this pandemic. I think most of the banking groups have taken the opportunity to get rid of staff or to take advantage of part-time working models. We have increased, this was budgeted. And going forward, we do not budget any further increase. So any future increases in staff expenses will be driven by gradual increases of salaries. We perform a group-wide salary review once a year. So you could calculate something like an inflation rate on salaries going forward.On the training, yes, our Academy remains closed, unfortunately, for us who enjoy going to the academy, teaching at Academy, exchanging with our staff and the banks at the Academy very much. There are no immediate plans of reopening, but next year, certainly, we will continue again with the curriculum. To which extent the curriculum will then be online or in person remains to be seen. And obviously it depends on the health situation and the travel restrictions in place at that point in time.Right now, we're trying -- we're designing online courses on some of the topics that works for some areas better than for others. But for now traveling within the group remains very, very restricted.
Thank you all for your questions and participation. I would like to hand the call over to your host, Mr. Schor, for any additional or closing remarks. Thank you.
Thank you, all of you for your interest and participation in our call covering the results of the third quarter. Thank you very much. We hope to have given you as much information and transparency as possible. If you have any additional questions, please do not hesitate to call Christian or Nadine.And just to give you information about our next scheduled conference call, it will take place when we publish our full year reports 2020 in March '21. Again, thank you very much for your participation. You have a very good day.