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Welcome, and thank you for joining the ProCredit Holdings Q3 2022 Results Conference Call. [Operator Instructions]
I would now like to turn the conference over to Gabriel Schor. Please go ahead, sir.
Thank you. Thank you. Thank you to AQS , and welcome to everybody to this call on the 9-month results of 2022 for the ProCredit Group. Gabriel Schor is my name and a member of ProCredit Holding Management Board. I'm joined by Christian Dagrosa, our Head of Finance Reporting and Controlling. And today, Hubert Spechtenhauser has joined us.
I trust that everyone is aware that my term as a Management Board member comes to an end at the end of this year after more than 30 years of deeply rewarding professional life, if I may say so, with the group. In the future, I intend to continue to support the group in a suitable form and as much as I can. So this is the last Investor Relations call I will lead.
Today, we wanted to use this opportunity to make the transition and introduce Hubert. Hubert And Christian will be responsible for the regular analyst calls going forward.
Hubert joined ProCredit Holding a year ago. We are very glad having him with us. He has brought with him rich international banking experience with ProCredit. He has been a member of the Management Board responsible for risk control since March. He now takes on the role of Chairman of the Management Board. Furthermore, subject to confirmation by BaFin, and as planned, Christian will join the Management Board in January '23.
We planned some 40 minutes that covers today's presentation, which has been available since earlier today in our web page. We will, of course, give sufficient time for any questions you may have. Let me also provide you with the usual warning to pay particular attention to the cautionary statements regarding forward-looking comments that you will find at the end of the results presentation.
With this, let me turn to the performance of the group. I will cover the highlights of our first 9 months of the year. I will then hand over to Hubert to take you through the strategic aspect of the group performance before Christian addresses financials, credit risk and regional development, including Ukraine in much more detail.
Slide 2 summarizes the key aspects of our 9-month performance. Resilient is a very good summary of the results. Our third quarter results are again driven by good operational and financial developments in the banks outside of Ukraine, which are countered by the additional provisions built for our Ukrainian operations. As a context of this result, a few words to Ukraine and our other markets. It is obvious that the situation in Ukraine is a very challenging one. However, our operations continue without major interruptions despite the unreliable power supply in the country. We have redoubled our focus on contingency measures, including large emergency power generator to ensure business continuity even during power outage.
Our other focus is, like always, maintaining very close contact with all our SME clients, all our SME clients, and understanding the impact of the situation on their business. Encouraging for the Ukrainian economy and society is the level of Western support indicated by events like the international conference on reconstruction last week.
More widely with inflationary pressure and uncertainty created by energy prices and supply which are continuing, GDP growth expectations, however, have been only modestly adjusted downwards, and our banks report a steady situation in the real economy and steady fiscal management in our countries of operations. Against this background, the group result of EUR 17.3 million, representing a return on equity of 2.7%, was driven on the one hand by the robust performance outside of Ukraine, supported by strong income development balanced, on the other hand, by the right high provisions for our operations in Ukraine.
The year-to-date net interest income is up 20% on the prior year and net fee income up by 9%. The 9-month provisioning cost of EUR 79.1 million, more than 90% of which are accounted for by our Ukrainian operation, with the stock of local provisions now exceeding the portfolio located in the Russian occupied zone. Relative to the same period last year, we achieved a strong 38% increase in group profitability, excluding Ukrainian operations, representing an annualized return on equity of 9%. As an example, the profitability of our larger Southeastern Europe segment increased by more than 40% to reach an annualized return on equity of 11.4%.
The group Q3 results showed a positive trend, contributing EUR 9.6 million to the 9-month results based on a very good development of net interest margin which increased to 3.2%, whilst provisioning comps remained on the same level as in Q2. The group capital level remained at a prudent level with a fully loaded CET1 ratio of 13.6%. As such, our financial performance of the first 9 months saw good progress in terms of our full year guidance.
Similarly, operational performance in terms of growth in loans and deposits is good. Loan growth was more focused in the first half of the year when the market conditions were stronger.
In Q3, we had a stronger focus on building deposits, particularly in countries with lower deposits to loan duration and with the main focus on managing margins. The exception has been our green portfolio, which we grew well in Q3 and now accounts for 19.7% of the group loan portfolio.
Group portfolio quality remains at a good level. Stage 3 ratios increased from 2.6% to 3.1% driven by Ukraine. While for the rest of the group, it stands at 2.2% and slightly decreased during this year. On the back of this solid fundamentals, we have also moved forward with strategic projects to strengthen the corporate structure of the group.
Within the next 2 years, as informed, we aim to convert ProCredit Holding in a stock comparison to German AG to strengthen its capital market positioning, particularly for international investors. This is being done with the strong strategic support of our core shareholders, and it goes without saying that the group impact orientation will be sustained.
As mentioned in my introduction, in parallel, we are taking steps to further strengthen our head office and management team to ensure we can take full advantage of opportunities as well as managing the current challenges.
In summary, what we are hearing is confidence, confidence about the business and financial performance and prospects outside of Ukraine. In Ukraine, we are managing the situation tightly in the short term and continue to see good midterm prospects. Strategically, the role of our specialized SME banking group across our region is recognized to be more important than ever. We believe there to be significant opportunities for our clients and in the emerging international interest and support for our clients of operations nowadays.
With these opening remarks, let me hand over to Hubert to take you through some other more detailed aspects of our performance.
Thank you, Gabriel. I am pleased to join the analyst call today for the first time. Indeed, I am pleased to have joined ProCredit at such an auspicious time. Despite the challenging operating environment, I see the group to be well positioned to continue to strengthen its position and performance in its core markets and to play an important role in rebuilding Ukraine at some point in the future.
I can only reinforce Gabriel's remarks that we are steadily strengthening our head office structure to best support the encouraging trends of our banks on the ground and to foster the enthusiasm and commitment we all share to have a positive economic and environmental impact.
In this context, let me start with Slide 3 showing the development in our core business, customer loan portfolio growth. Year-to-date, growth in customer loans is EUR 370 million or 6.2%, reflecting particularly strong demand for working capital loans as clients stock up inventory in the wake of the pandemic and in anticipation of higher costs in this more inflationary environment.
As Gabriel mentioned, growth year-to-date of 6.2% was focused more on the first half year. In Q3, good growth in our markets outside Ukraine was offset by a reduction in loan portfolio in Ukraine. Also in Q3, we continued to focus on enhancing profitability and on building local deposits in certain markets. The green loan portfolio grew well by EUR 39 million in Q3 and by a strong 10% year-to-date. This reflects the growing interest in energy efficiency and renewable energy projects in the light of higher energy costs.
Production in our countries of operation remains far less energy efficient than in the euro area. Investments in energy efficiency by SMEs is now more than ever central to competitiveness and net zero efforts. The lower graphic on this slide shows this growth of green loan portfolio, which now stands at EUR 1.2 billion or 19.7% of our portfolio. Looking forward, we continue to see good opportunities for further growth.
Slide 4 shows the corresponding good development in deposits, which have increased year-on-year by EUR 712 million or some 13.5% based on strong client relationships and the appeal of our digital approach. Year-on-year growth was achieved mostly with business clients, although private client deposits also increased visibly with a year-on-year increase in volume of EUR 265 million, reflecting progress in our continued strategic priority to consolidate our digital private client offering and positioning.
The share of site and FlexSave deposits increased year-on-year, although we anticipate term deposits also to develop as deposit markets become more interest rate-sensitive. Year-to-date and year-on-year, growth in deposits is ahead of loan portfolio growth as the group puts more strategic focus on the deposit-to-loan ratios, particularly in those banks where the deposit-to-loan ratio is below 100%. This will remain an important part of our strategy.
A robust deposit base is important as volatility and interest expenses increased. While we anticipate an increase in deposit expenses going forward, there are good opportunities to respond on the lending rate side. Most banks are, therefore, increasing their marketing and IT expenses somewhat to increase our profile as an attractive savings and service bank amongst target private clients.
Slide 5 shows that the macroeconomic outlook for our countries of operation remains resilient, although, of course, uncertainty has been introduced by the war, higher energy prices and inflation as well as the downturn in demand in the Eurozone. Despite the anticipated dip in economic activity in the second half of this year, GDP forecasts for our Southeastern and Eastern European regions, excluding Ukraine, continue to foresee growth in 2022 of around 3.5% with a midterm outlook of close to 4%. Even in countries like Bulgaria and Serbia, which are strongly dependent on Russian energy supplies, the GDP forecasts for 2023 are firm at around 3%.
The outlook for the Ukrainian economy, of course, continues to be strongly negative. The IMF foresees a decline in GDP of 35% in 2022, and there is still no prediction for 2023. Inflation is expected to reach on average about 11% this year in our countries of operations, although this is expected to come back down in 2023 to approximately 5% and to below 3% the year after depending on country.
Central banks have reacted to this tightening monetary policy and increased base rates. As such, we are giving significant attention to margin development. Despite generally positive expected GDP development, the downside risks are clear, and we are looking prudently at credit risk in all countries. Our business client advisers are working particularly with the SME clients with higher energy needs and costs. Overall, therefore, the second half of 2022 is characterized by more challenging market conditions to which our banks are responding to positively.
Midterm, we believe the prospects for all our regions to be robust. We see that our regions of operation gained in geopolitical importance, and international investments will continue with EU support likely to intensify. In achieving improved macroeconomic alignment and integration as well as greater energy efficiency, SMEs will play a pivotal role. In this context, the role of a specialized SME banking group is more central than ever.
Please let us turn to Slide 6 to show how we are performing relative to guidance. We now foresee medium rather than high single-digit growth in our loan portfolio for this year. This reflects the good growth in the first half of the year, but the flat development in Q3 and limited expectations for Q4 given the developments we have described. Having said that, we continue to capture profitable growth opportunities, particularly also in green lending.
It remains difficult to narrow the guidance range for group profitability. Christian will cover the details of how we are working closely with clients in Ukraine to assess and limit credit risk, but the implications for year-end provisions remain difficult to predict.
Generally, looking forward to the last quarter, we aim to consolidate the improvements in profitability in banks other than Ukraine. We continue to put focus on the income side and net interest income expansion. At the same time, we expect a degree of headwind from high base rates introduced in Ukraine and deposit pricing group-wide.
Cost-income ratio in the first 9 months of 2022 was 60.7%, significantly improved compared to last year. We expect our year-end cost-income ratio to be in the range of 60% to 63%. At this stage, we would expect the cost/income ratio to end the year somewhere in the middle of this range, potentially slightly above that depending on the degree of Q4 seasonal effects which we will experience.
Our CET1 ratio at the end of September stands at 13.6%. We expect to end the year with a CET1 ratio of above 13% and a leverage ratio of around 9%. Our midterm guidance remains unchanged, targeting a cost-income ratio below 60% and a return on equity of about 10%. Annual loan growth going forward is targeted at a medium to high single-digit percentage rate as we consolidate our strong market position, focused growth in green and higher-margin segments whilst building deposits and effectively managing risk-weighted assets.
In summary, let me reiterate Gabriel's confidence about the business and financial performance and prospects outside of Ukraine. It is clear that the group result is strongly impacted by prudent provisions in Ukraine this year. Strategically, however, the current developments only reinforce our commitment to our way of responsible banking in our regions of operation. We see the role of the ProCredit group of banks as more important than ever, and we have well-grounded confidence about delivering good financial results in the medium term.
Let me now hand over to Christian, who will give you more details on the financial aspects of the group results and an update on the situation of our bank in Ukraine.
Thank you, Hubert, and thank you, Gabriel, for this introduction. In the second part of the presentation, we will, as always, take a closer look at the financial performance of the group, at least first 9 months of 2022, and then also cover the major risk and capital indicators. As in previous analyst calls of this year, we also prepared a slide on our bank in Ukraine to give you more insights on the situation on the ground.
Let's start with a year-on-year view of the P&L statement and its major underlying KPIs. Our net interest income shows a strong increase of EUR 30.7 million with respect to the previous year that's almost 20%. This is driven by substantial year-on-year volume effect, but also higher interest rates, which are in large related to climbing base rates in most of our countries. The net interest margin is now at 3.0%. That's exactly 20 basis points above the previous year. And the net interest margin of quarter 3 alone is even at 3.2%. Net fee income grew by EUR 3.2 million against the previous year figure that is approximately 9% more. Fee income from transactions and cards continue to grow steadily are the major driver behind this positive development. Other operating income increased by EUR 8.3 million. This reflects a temporarily high positive results from derivatives of approximately EUR 5 million, but also a full write-down of goodwill in Ukraine in the amount of EUR 800,000.
In total, operating income is up a strong EUR 42 million. That's approximately 20.5% year-on-year. Personnel and admin expenses are up by about EUR 22 million, with higher staff expenses as well as expenses on IT and marketing being the major drivers. This position also includes onetime expenses of approximately EUR 6 million, which I will elaborate on later in more detail.
In total, positive operating leverage with operating income growing much stronger than operating expenses. This, all in all, resulted in a significant improvement in the group's cost efficiency indicators. The cost-income ratio is now at 60.7%. That's 1.7 percentage points below the previous year.
Of course, we booked substantial provisions for our Ukrainian portfolio as the aggressions against the Ukrainian people continue. As of end September, we have moved all portfolio in occupied area into Stage 3, which has been the major driver of this quarter's provisioning expenses. Year-to-date, our provisioning expenses amount to EUR 79.1 million. This corresponds to an annualized cost of risk of 173 basis points. 92% of these provisions on a group level come from our Ukrainian operations. The cost of risk of our remaining 11 banks amounts to an average 15 basis points.
Given the substantial level of provisions, our overall results was currently capped at a total of EUR 17.3 million, which corresponds to a return on equity of 2.7%. However, with only a few exceptions, our banks show for in part even very significant improvements in both underlying and absolute profitability. The ROE, excluding the negative result contribution of ProCredit Bank Ukraine is 9%.
Let us move on to the details of the most relevant line items. The net interest income seen here continues to improve on a quarter-on-quarter basis, mostly due to continued positive pricing effects. Base rates in most of our countries have increased since the beginning of the year, which for the most part still has a positive effect on our bank's margins. The increase in net interest income against quarter 2 is of EUR 2.5 million. That's 3.7% in spite of a marked NII reduction in Ukraine of EUR 2.6 million, which we highlighted here in light red. This reduction is mainly due to the devaluation of the local currency in July as well as higher funding costs related to the current policy rate level of 25%.
Net interest income for the group without Ukraine actually increased by more than 9% quarter-on-quarter, highlighted by the gray bars here on the slide, with quarter 3 net interest margin up 19 basis points against quarter 2 and even 37 basis points against quarter 1. More importantly, the 2 net interest margin graphs highlight that the group's net interest margin is now almost the same whether we include net interest income from Ukraine or not. This underlines the strong diversification within the group.
Moving on to provisioning expenses. We can see that provisioning expenses in quarter 3 have been broadly in line with the level that we recorded in quarter 2. Most of the Q3 provisioning expenses, that is EUR 16.6 million to be precise, came from our Ukrainian bank as we moved the remaining of our portfolio in currently occupied areas into Stage 3. That is now approximately EUR 52 million or 8% of the entire portfolio that is located in occupied areas. The total stock of provisions for our Ukrainian portfolio now amounts to EUR 87 million and thereby exceeds this portfolio that is located in currently occupied areas by EUR 35 million.
In our remaining banks, provisioning expenses in quarter 3 amounted to EUR 5.5 million, which was more than anything driven by additional management overlays to our expected credit loss model. In our quarter Q -- apologies. In our quarter 2 call, we had explained that in light of the fast-changing macroeconomic environment, with inflation at high levels and disruptions in food and energy supply chains, we retained most of the provisions that had been built during 2020 at the onset of the COVID-19 outbreak. While the additional management overlay applied to our IFRS 9 model in quarter 3, the total provisions from management overlays for banks outside Ukraine now amount to almost EUR 23 million. Additional overlay for our Ukrainian bank in the amount of EUR 13.7 million comes from applying a higher LGD rate for the entire portfolio. We provided more detailed explanations on this mechanism in our quarter 2 call.
Year-to-date, provisioning expenses for the group now amount to EUR 79 million, of which EUR 73 million come from our Ukrainian subsidiary. The cost of risk of our banks outside Ukraine is at a low level of 15 basis points and actually only 2 basis points if we exclude Tier 4 mentioned overlays that were applied in quarter 3.
Moving on to fee income. Quarter 3 net fee income increased slightly by EUR 300,000 against quarter 2 that is broadly in line with our business development. Against the third quarter of 2021, we see a more marked increase of EUR 1 million, that is around 8%, which is indeed a reflection of the steady expansion of our client base. Year-on-year, net fee income stands at EUR 3.2 million above the previous year's figure.
Moving on to Slide 12, where we see personnel and administrative expenses. These expenses have increased with respect to the previous quarter by EUR 3.2 million, with operating income growing slightly more strongly than that, EUR 3.9 million. Nonetheless, the cost-income ratio increased slightly.
As we can see on the graph, with respect to quarter 2, it's now on a quarterly level of 61.9%. One driving factor for this development in quarter 3 has been the reduction in the Ukrainian foreign exchange rate, which led to a contraction of the otherwise highly cost-efficient Ukrainian P&L, thus reducing operating income on the group level more strongly than operating expenses.
Personnel expenses increased by EUR 2 million in quarter 3, which is mostly driven by our annual salary review, which was conducted in July. Some EUR 400,000 of the overall increase, so around 20%, relates to onetime payments to staff for, yes, what is indeed exceptional contributions in what has been an overall challenging year for the group.
Administrative expenses increased by EUR 1.2 million, mainly due to increased marketing expenses at the level of our banks. Much like for the first half year, we recorded additional one-off expenses in quarter 3 in the form of audit, legal and consulting fees in relation to the war in Ukraine and its broader implications for the group. In quarter 3, these effects amounted to EUR 2.7 million and also include fees for the works around the exchange offer that we made to bondholders earlier in August. Some of you might have noticed our corporate news from August 23.
Otherwise, we do see inflation working its way through the system in our countries of operations driving up a broader variety of cost items. Year-to-date, our cost-income ratio is at a good level of 60.7%, 1.7% percentage points below the previous year. For the whole 9 months, we see extraordinary cost items in the amount of EUR 6.8 million against extraordinary income basically only from the revaluation of derivatives in the amount of EUR 5 million, so a net EUR 1.7 million to EUR 1.8 million negative, if you will. At this point, we believe that extraordinary cost items related to the war in Ukraine should reduce significantly in the fourth quarter and the quarters ahead.
The next section provides a more differentiated view by regional segment and aims to visualize the strong underlying developments that we have achieved in basically all of our banks outside Ukraine.
So let's take a look at the contribution of the individual segments. Our banks in Southeastern Europe continued to achieve very good results. Their contribution to the consolidated profit was EUR 52.5 million, that is EUR 16 million more than last year. The return on equity improved significantly to a sound double-digit figure of 11.4%. And the cost-income ratio dropped by 6 percentage points, well below the 60% mark.
For our 2 Eastern European banks outside Ukraine, if you will, Georgia and Moldova, the contribution to the consolidated result also increased by a strong 40% from EUR 11 million to EUR 15.5 million. This corresponds to an improved annualized ROE of almost 16% as well as a further improved cost-income ratio of 49%.
Our Ecuadorian bank here marked at the South America segment achieved a profit of EUR 2 million. This corresponds to a return of 5%. The cost-income ratio also improved visibly by more than 15 percentage points as positive scaling effects continue to materialize.
The group performance, excluding the negative contribution from our Ukrainian bank, was overall strong. The ROE of 9% is 1.7 percentage points above the previous year's figure. The cost-income ratio, excluding Ukraine of 64.1%, is higher than that on the consolidated level, but it also shows a marked improvement against the previous year of more than 3 percentage points.
It is also worth highlighting that loan growth for our banks, excluding Ukraine, amounted to a good level of 8.5%. At last, our Ukrainian bank contributed negatively to the group results by EUR 43.4 million due to the aforementioned provisioning expenses of EUR 73 million. Loan portfolio in Ukraine reduced by some 9% since the beginning of the year.
Now let us take a deeper look into the performance of our segments and the banks therein. As I mentioned, profitability of our largest segment, Southeastern Europe, improved visibly both structurally as well as in absolute terms. Higher net interest income on the back of overall stable margins has achieved a 21% increase in operating income year-on-year. With costs increasing only slightly, the cost-income ratio improved by a strong 6 percentage points to a level of 56%. Credit risk costs remained at almost routinely low levels in spite of the management overlays that we added in quarter 3. And the return on equity of the segment increased from 8.6% to 11.4%. Below, we see the return on equity and the cost-income ratio per bank. Both these indicators improved or at least stayed at the previous year good levels in all banks of this segment.
In Eastern Europe, on this page now, including our bank in Ukraine, we see a similarly marked increase in operating income of 19%. That is more than EUR 11 million. Operating expenses here increased by around half that amount, EUR 5.9 million. Here, our bank in Georgia is showing results that are broadly in line with what we've seen in previous years with a good return on equity of 15% and a cost-income ratio of below 50%.
In Moldova, results improved visibly with respect to the last year as scaling effects continue to materialize and credit risk costs remain in check. Also, the bank is temporarily benefiting from higher base rates in the country. The segment result of a negative EUR 28 million is, of course, heavily influenced by the substantial provisions for our Ukrainian portfolio.
With regards to Ecuador, I basically already highlighted the improved cost-income ratio as well as the profit of just above EUR 2 million. The improvement in operating income of 37% is indeed remarkable, driven above all by higher net interest income on the back of steady margins and some very substantial volume effects.
Moving on to our special information slide, if you will, on our Ukrainian bank. The recent indiscriminate bombings of cities outside the conflict area, including Kyiv, is of course a concerning development for all of us and the prospect of peace. We are every day relieved to hear that our staff remains in good health, including 9 brave colleagues who joined the Ukrainian defense forces.
Since our last analyst call in August, more people have returned to Ukraine. And as of today, just around 7% of our staff is working from abroad. We have also since then continued to build our contingency measures in the bank to ensure continued operationality of the institution even if the attacks on civil infrastructure continue. These include now also large emergency power generators.
Our loan portfolio in Ukraine reduced since June 30 rather substantially by a total of EUR 130 million. This was above all driven by the reduction in the Ukrainian exchange rate early in July. Also, new disbursements have been at a very low level since July as the high policy rate level of 25% curbs demand for new loans rather significantly. And finally, the steady amortization from repayment of outstanding loans led to a reduction of our loan portfolio of around EUR 50 million.
Let's look at our map, and let me briefly recap the logic of this chart areas in which fighting is currently ongoing or has been ongoing recently are highlighted in red. The colors green, yellow and orange categorize areas by the likelihood that business clients could be affected by the war, whereas orange is more likely to be affected and green less likely. In dark red, we highlighted those areas that have been occupied by hostile forces since 2014. In these areas, we have no outstanding exposure.
In the red area, we now have about EUR 72 million in loans outstanding. This corresponds to 10.6% of our bank's total loan portfolio. It is not the same as the occupied area, where we have a portfolio of around EUR 52 million. Some 80% of the loans in this area are now classified in default, including all exposures located in the areas that are occupied currently. The average coverage rate within this zone is now at 62%.
68% of our portfolio is in areas that is now colored in green. That is a 15 percentage point increase with respect to the half year figure as more and more businesses are able to continue their regular course of operations and resume paying their installments without any meaningful delays. The share of defaulted loans is now at 9.8%. And though the situation on the ground remains dynamic, one can assess that the large part of portfolio reclassification is now completed, assuming now -- assuming, of course, no further deterioration of the conflict going forward.
The stock of provisions for our Ukrainian portfolio is now at EUR 87 million. That number exceeds our default portfolio by around EUR 20 million and the portfolio in the red zone by around EUR 15 million. This results in a default coverage of 130% and the coverage of the red zone of 120%.
Year-to-date, our provisioning expenses in Ukraine amounted to EUR 73 million. The bank's accounting loss is of the amount of EUR 43.3 million. It is important to note that in spite of the scale of the war and its material impact on our bank, the bank's capital and liquidity positions remain very solid. As of September 30, the CET1 buffer is at a comfortable 5.1 percentage points.
Let us finish the presentation with credit risk on the group level and our capital position. This slide is, of course, familiar to most of you. It shows the high level of diversification of our loan portfolio, both in terms of geographic coverage and industry sector. There have not been any material movements in this pie chart over the last years, which is a reflection of our stable business strategy. Of our overall loan portfolio, some 40% are to agricultural enterprises and companies involved in local productions. Consumer loans, of course, play no strategic role in our business model.
Slide 21 is more of a reading slide. It summarizes the outlook for countries of operation in Eastern Europe. It is obvious that these countries struggle with the same uncertainties that are currently overshadowing most of the world's economies: inflation, uncertainty with regards to energy supply and prices and a sense of increased geopolitical instability. However -- and repeating what Hubert mentioned earlier, the growth outlook for our countries of operation by IMF is a stable one with average growth rate of around 3% in 2023 and 4% for 2024. Also, inflation is expected to normalize relatively quickly after 2023.
Now in spite of the overall optimism for our region, we recognize the heightened potential for downside risks and have, therefore, increased management overlays in our ECL model, as I explained earlier, in spite of or maybe even because we are, as of today, not seeing any meaningful signs of portfolio deterioration or deterioration of our credit risk early warning indicators. Given the macroeconomic challenges ahead, however, we feel very comfortable with the quality of our loan clients and a strong diversification across countries and industry sectors.
On Slide 22, we see the development of our default loan portfolio and our Stage 2 loan portfolio. We have illustrated on this page the development on group level as well as without -- sorry, and without the inclusion of Ukraine. Our default loan portfolio increased since the beginning of the year by 0.8 percentage points to a level of 3.1%. This increase is entirely driven by stage transfers within the Ukrainian portfolio as we moved some EUR 57 million of portfolio into Stage 3. In the remaining banks, the share of Stage 3 loans actually decreased by 0.2 percentage points to a level of 2.2%.
Our Stage 2 portfolio increased visibly since the beginning of the year as we moved some EUR 235 million of our Ukrainian portfolio into Stage 2 mostly as per the significant increase in credit risk criteria. In our other banks, the share of Stage 2 loans remained broadly steady at a level of 3.7%. The coverage of the forward loans increased visibly by 7.5 percentage points to 57.1%. This reflects, above all, the management overlay that we applied to our Ukrainian portfolio, which causes higher average provisioning levels for defaulted loans for Ukrainian loans.
Moving on to capital. As of September 22, our CET1 ratio stands at 13.6%, well above the regulatory mark of 8.2%. Our core capital increased by EUR 41 million, mainly due to the attribution of profits of 2021 and the reversal of dividend accruals. Risk-weighted assets increased more markedly than usually, EUR 583 million since the beginning of the year. Besides the portfolio growth that we talked on earlier, this development is also impacted by the sudden downgrade of the Ukrainian state, resulting in higher risk rates of 150% for all exposures against the Ukrainian state that also includes all central bank balances.
Let's move to Slide 24, where we see the major effects on our CET1 ratio in this third quarter of the year. While there has been less portfolio growth in the third quarter, we have been able to reduce risk-weighted assets of our loans through the attribution of certain guarantees to our risk-weighted asset calculation. This effect has been offset by higher levels of liquid assets. Because not all banking regulations of our countries of operation are considered EBA equivalents, some of our central bank balances are weighted at 100%.
As of September 30, exposures to governments and central banks add some EUR 515 million to our risk-weighted assets. That is approximately 8% of our entire risk-weighted asset mass. Other effects include the growing equity in our banks due to steady profit generation, which is reflected in our market risk-weighted assets.
Well, I would say this concludes our assessment of our group's performance in the first 9 months of 2022. Gabriel, Hubert and I would like to take your questions now.
[Operator Instructions] The first question comes from Mr. Papst from Edison Group.
I have 3, if I may. Firstly, you've presented on the slides that there are already several regional banks in the Southeastern European segment which generate double-digit ROE, while some are still at single digit. What is your kind of focus in terms of dragging further profitability improvement in the region? I mean are you focusing on those banks that would generate single-digit ROE? Or do you expect, I mean, the profitability to increase across the board?
Second, you said that the CET1 buffer in Ukraine is at 5 percentage points. I believe that the regulatory requirement is 7% , which would [indiscernible] CET1 ratio of 12%, which is broadly stable with what [indiscernible]. I presume that this is partly due to loan repayments and the reduction in risk-weighted assets. Maybe you can talk us through the key factors here.
And finally, you said that as part of the reclassification of the portfolio is already done. So does it mean that you should expect lower loss provisions in Ukraine in the coming quarters, all else being equal?
Thanks a lot, Milosz. The -- not sure we got all the questions because there was -- there seemed to be some interruption in the line. But let me give it a try. If I don't answer them spot on, let me know. So on the first question, in our Southeastern European segment, we have improvements in profitability for most of the banks. For example, that would not include our Bulgarian bank, which has been, yes, basically generating a rather steady ROE of 3% -- sorry, of 11% to 12% over the last 3 years.
I would argue that in most of the other banks in Southeastern Europe, there is still strong potential for improvement. The source of the improvement is, however, different from country to country. For example, in Serbia, Serbia is our second largest bank in the segment, profitability has increased the most actually in this segment mostly through optimization measures.
On the refinancing side, the bank basically has already a very large critical volume size on the asset side, and it's generating a lot of income. It's a question of reducing funding costs above all. Then we have some smaller institutions, Bosnia, Albania, Romania, that basically need to scale. They need to increase in size, and we have seen very positive effects in this year in particular, both in Romania and Bosnia. Romania is probably slightly overperforming with a very healthy double-digit ROE that is probably not sustainable for the next year or 2. But the institution is on steady feet when it comes to income generation, but also needs to grow a bit further. Same can be said about Bosnia.
And Albania still has the smallest portfolio in this segment. Here, we have just around 120 employees. The bank has, in the last years, had higher-than-average credit risk expenses. These credit risk expenses have been in check now for the last 2 years. And here, we would also expect slowly but steadily increasing profitability.
And then lastly, Kosovo. Kosovo is probably more in the -- on the level of Bulgaria, a very mature institution that has been growing in this year, even outpacing GDP growth. But I would also say that here, profitability is somewhat capped at the level that we've seen over the last 3, 4, 5 years, which has been anywhere between 12% and 15%.
Now on your second question, the CET buffer in Ukraine. Indeed, at 12%, the CET1 ratio is actually broadly on the level before the war. The portfolio reduction does play a role, but not a big role because much of the reduction is only in euro terms. Through FX effects, the reduction through repayments is just around, yes, less than EUR 50 million. So that's not a decisive factor. The decisive factor is indeed that the bank has used guarantees from international financial institutions, that these guarantees already existed before the war. They have used these guarantees for the risk-weighted asset calculations attributed to the calculation. They have not done this previously because within our group, our banks need to comply with group capital requirements and local requirements, whichever is the stricter ones. Therefore, they were following the group ratios as a guideline, which led to a relatively high level of leverage in the institution. And maybe, Milosz, you could repeat the last question. This is really the one that I did not get at all.
Sure. Sure. Of course. Yes, I was asking because you said that the large part of the reclassification of the portfolio has been done. So I mean, all else being equal, shall we expect lower loan loss provisions in the coming quarters in Ukraine? Is it how we should understand that?
Okay. I think in Ukraine, we want to provision basically the risks that we see today as much as possible until the end of the year. When I said reclassification has been broadly done, we are now at 10% default. This is likely the level plus maybe 1, 2 percentage points that we would see at the end of the year. Always with a big caveat that the situation does not further deteriorate, of course. So provisioning expenses in quarter 4 is difficult to assess at this stage. We would expect them to continue growing simply because on a case-by-case basis, we will take decisions, especially in the red zone, on defaulted loans to see whether the level of provisions is still adequate or not.
Right now, defaulted loans in Ukraine are provisioned at an average of 75%. Here, we do not take into account any collateral in the calculation. But of course, we do that for a reason because sometimes, collateral might not be able to be accessed at all, especially in occupied areas. So there might be a need in quarter 4 for increasing the coverage. And this will probably be more decisive factor driving provisioning expenses in quarter 4 than reclassifications. However, in quarter 4 -- I think in quarter 3, provisioning expenses laid a good ground for quarter 4, and we should not expect a significant increase in provisioning expenses in quarter 4.
The next question comes from Philipp Häßler from Pareto Securities.
I have 3 questions, please. Firstly, on the FX gains, I think you booked EUR 60 million for the first 9 months, more or less equal to the EBT. Maybe you could explain again where this comes from and what's your outlook here for you for Q4. And also, would this play a role next year?
Then on Ecuador, the brokerage rate is really impressive. What ROE do you see is achieved in the midterm? And then on the NII margin, which also looks quite nice now at 3.2%, if I remember correctly, after the first 9 months, how do you see the development going forward there?
Thank you, Philipp, for your questions. Let me maybe start with the with a question on NII. So the growth in NII has been again driven by a good increase in the net interest margin from 2.9% in quarter 1 to 3.1% in quarter 2 to 3.2%, as you mentioned, in quarter 3 but also our good loan growth, especially in the first half of the year. Do we expect this positive development to continue? I would say not at the current pace. We have commented on the rather increasing deposit rates already, but also have made it clear that loan growth does not continue on such strong levels as we have seen in the first half year. So for net interest margin, we expect the next quarters to be rather stable.
One point that we highlighted in this quarter is very positive in our view. This is the development of net interest income and net interest margin in our group without the Ukrainian bank. We observed that the group on average has almost completely closed the net interest margin gap to our bank in Ukraine. Net interest income outside Ukraine is growing quite strongly.
In terms of base rate, the situation remains dynamic as we have already seen quite significant rate increases, for example, in Ukraine, Moldova, Romania, Serbia, Georgia and Albania and also from the ECB. So we will see in the next months really how inflation is further developing. And as a consequence, this will likely very much influence future rate developments.
Currently, most of our banks are still benefiting from the higher interest rate environment, but we do expect that more clients will place funds onto term deposits, which will lead to interest expenses picking up at some point. In Ukraine, for example, where base rates were increased strongly to a level of 25%, we have seen net interest income to start declining in quarter 3, as anticipated. So it's a bit difficult, to put it in a nutshell, to be precise on the net interest margin development. Certainly, we won't expect any significant volume effects in the fourth quarter, and I would say we'll take it from there.
On the FX income, this was your first question. Indeed, the income from FX transactions has been higher than last year by around EUR 4 million. It's a bit inherent with the overall volatility on FX markets. When there is volatility, it allows banks to charge a bit more for buffers and for safety margins. The outlook again depends a bit on the outlook on the FX market. It's difficult to foresee. But certainly, some of the increases will manifest itself going forward. Some of the increase, however, might be really just very particular to this current year. Maybe Gabriel can take your question on Ecuador.
Can you repeat your question, Philipp?
Yes, sure. I was just interested in the profitability outlook for Ecuador because you have achieved quite good growth over the last quarters, now clearly profitable. What ROE do you see is achievable in the midterm?
Indeed, the result of Ecuador for the first 9 months, they're, let me put it, encouraging in any case. Nevertheless, expectation, we would like to be cautious on it. Liquidity situation in Ecuador, we expect we have to increase our deposit base in Ecuador, which is closely related to stronger interest rate increase. Therefore, we do expect for the end of the year return on equity at the level we are observing it now.
In the midterm, for sure, Ecuador has potential to grow. The macroeconomic condition, nevertheless, should be observed. Also politically, without getting -- much on details about it, therefore, the encouraging results indeed. The good one about the perspective, we would like to be cautious and observe increasing our deposit rates so that we can manage liquidity in a tight way. That's the way I would see it, Philipp.
The next question comes from Marius Fuhrberg from Warburg Research.
Just 2 questions remaining from my side. The first one is on the situations in Ukraine. Are there already programs for reconstructions or plans for construction? Or is it too early at this stage? And how would you participate in that or benefit from that? The second question is with regards to your personnel costs, which grew quite significant in Q3. Whereas last year, Q4 was the quarter with the highest personnel costs. You mentioned that you had some annual salary review and also onetime payments in Q3. But should we expect the personnel costs to be -- or to remain on a rather elevated level, also keeping in mind that inflation is also hurting your staff as well?
Well, maybe I'm going to take the first question on Ukraine reconstruction, our plans or plans in general and our potential participation. Assuming that the war at some moment will end, we are convinced that there will be enormous amounts of money being invested in Ukraine for a reconstruction of the country. And we do see our institution as well, and if not ideally, positioned to support in such a reconstruction. And we are convinced that European institutions will be prepared to support this reconstruction. And yes, indeed, therefore, in the medium term, always assuming that the war at some moment in time will end, we do see substantial upside and an opportunity for our institutions.
And Marius, let me take the question on personnel expenses. So they have indeed for the 9 months increased year-on-year by some EUR 8.4 million or 13%. Taking out, as you mentioned, the onetime additional salary payments of EUR 1.2 million, that is still a EUR 7.2 million increase, 11%. So that is still indeed very meaningful.
Also on a quarterly level, we had a EUR 2 million increase with respect to quarter 2, of which, again, just around EUR 400,000 were related to onetime payments. So EUR 1.6 million is sort of the increase that comes from the salary review. And you're right that last year, we had a more pronounced increase in quarter 4, which was related to onetime payments to staff in quarter 4, indeed, in the amount of around EUR 2 million.
So this -- let me remind you maybe a bit on the bonus payments, so to say. We don't have contractually agreed bonus systems. We indeed oppose them. We think they're detrimental to banking practices. But we do -- whenever we see that, that staff is performing extraordinarily well under difficult circumstances, we do, of course, take the liberty to pay out bonuses on an individual level.
Last year, I repeat, this was EUR 2 million for staff in Eastern -- yes, mostly in Eastern -- entirely in Eastern Europe actually, some 80 people. And this year, we had onetime payments at the beginning of the year, first of all, in Ukraine for people to take preparations for the invasion, if you like, and then some additional payments in Georgia and also in Germany.
Now as a group, we continue to grow in that period and increased number of employees also by 5% year-on-year. So the remainder, basically, the difference between the 11% cost growth and the 5% employee growth, that some 6%, is related to structural salary increases that we see at this stage. And going forward, we expect this to gradually continue as the results from recent salary rounds will only gradually be also reflected in our actual expense line.
So I would expect salaries to increase in the fourth quarter and also into '23. And then probably it will start again flattening out a bit more. But indeed, inflation has a lot to do. Inflation is characterized by many signs. In Eastern Europe, it is increasingly difficult to find good staff for our banks. There is a constant influx of highly qualified people from Eastern Europe, and this indeed means that we have to compete. We compete mostly with our corporate culture, with our trainings, but people also compare us on the basis of salary. So here, we have to make adjustments as well.
Ladies and gentlemen, this concludes the Q&A session. I will hand back the call over to Gabriel Schor for any closing comments. Thank you.
Thank you, and thank you all for your interest and for the participation in our call covering our results in the first month of this year. We hope to have given you as much transparency as possible. If you have any additional questions, please do not hesitate to contact Christian or Nadine Frerot.
The next scheduled conference call will take place when we publish our full year result of '22, and it will take place in March '23. Thank you once again for your participation. And from our side, all the best.
Ladies and gentlemen, the conference has now concluded. You may now disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.