Good day and welcome to the Grenke AG full year results 2021 conference call. For your information, this conference is being recorded. To ask a question today, please signal by pressing star one on your telephone keypad. At this time, I would like to hand the call over to Anke Linnartz. Please go ahead.
Good morning, ladies and gentlemen. Welcome to our today's call. My name is Anke Linnartz. I'm Head of IR at Grenke, and with me today are Michael Bücker, our CEO, and Dr. Sebastian Hirsch, our CFO. Just before we dive into things, I would like to let you know that this call is being recorded and will be archived on our website. We will start with the presentation by Michael Bücker and Dr. Sebastian Hirsch, and are going to have a Q&A session right after the presentations. I stop here and I pass the call on to Michael Bücker.
Yeah. Welcome, ladies and gentlemen, to the presentation of our results for the 2021 financial year. Before diving right into numbers, I would like to start by giving you an update on where we stand at the moment on a few central topics. First, a few weeks ago, in February, the German Federal Financial Supervisory Authority, so-called BaFin, announced that it had officially finalized its institution-related measures as part of special audit of Grenke Group that took place between autumn 2020 and spring 2021. Second, during those audits, we proactively developed a set of comprehensive initiatives to address the shortcomings in general. I'm pleased to say that the implementation of these initiatives for our further development is progressing well. Overall, I feel, and this is perhaps the most important news of all, Grenke is indeed returning to normality.
As a testimony to this is, and this is my third point, we provided a powerful boost to our business in the final quarter of the last year throughout the global sales offensive. This momentum has been ongoing as far as we can tell throughout the first quarter of 2022, despite the recent developments in Ukraine. That said, we feel we are generally quite resilient economically to these sad developments in Europe. Any direct or indirect effects would be minimal for us. First and foremost, we have essentially no business in Russia or Ukraine. In terms of a potential indirect impact, higher inflation rates could actually imply higher end of life values. However, our solid funding mix, including the refinancing via our Grenke Bank, provides us strong and secure financing throughout times of crisis.
History shows us that under such circumstances it is possible to raise pricing on financing faster than the increase in deposits and funding rates. This now brings me to the result of our 2021 financial year. Despite challenging circumstances, we managed to increase our value and strong profitability during this past financial year. Overall, we achieved new leasing business volume of EUR 1.7 billion, and as we have pointed out, the fourth quarter of 2021 was already significantly above the previous year. The consolidated group net profit for 2021 was 95 million euros, and this includes an extraordinary profit of EUR 23 million due to the sale of our minority stake in viafintech. Without this extraordinary item, our net profit last year would have been EUR 72 million.
In view of the extraordinary circumstances, both internally due to the multitude of audits and externally due to the influences of COVID and the global supply difficulties, we feel that this is a very good result and shows how robust our business model is. As you will hear in a minute, we achieved all our communicated targets in all three categories, new leasing business, net profit, and equity ratio. I would also like to take this opportunity to let you know that the process of acquiring the franchise companies is ongoing. As we have already stated, the leasing companies operating outside of Germany are fully consolidated in our financial statements. Following the conclusion of our respectable financial year, 2021, and the end of the BaFin investigations, we now want to conclude the negotiations on the franchise acquisitions by end of the year.
With that, I would like to hand over to our Chief Financial Officer, Dr. Sebastian Hirsch, who will now explain all the figures for the past financial year to you in detail. Over to you, Sebastian.
Yeah. Thank you, Michael. A warm welcome also from my side. Yes, we are back to normal, as Michael mentioned, but at the same time it's certainly a balancing act because of the war in Ukraine. We can still proudly look back to a successful and solid financial year 2021. We have worked a lot over the last two years to create a strong starting point for our future development, and we will start that today. Let's first look back to the financial figures 2021. I would like to start with the new business development and especially in leasing our strongest and most important segment, as you are aware of. In the course of the year after a slight start, we see that here in the first three quarters, we had a huge acceleration in the fourth quarter of 2021.
Of course, the year was affected by the COVID pandemic and the second half of the year also by the supply chain bottleneck. The strong rebound in Q3 led new leasing business up by 22% compared to Q4 2022, meaning nearly EUR 100 million on top of that level. Compared with Q3 2021, we saw an increase by roughly EUR 150 million. Since the beginning of the COVID pandemic, you are aware of that back in March 2020 until Q3 2021, we focused wrongly on risk reduction and a selective sales approach. That means that we avoided new business with customers from certain industry sectors, avoided doing new business with higher credit scores and higher risk, and more thoroughly focused on small tickets, on very small tickets, which are more profitable.
In Q4 we went back to our, let's say, more or less normal business, taking higher ticket sizes on average, taking a bit more risk, and so we got an acceleration in new business. Most important for us on the next slide, you can see that is our development in contribution margin. That is the main driver for our operating income of the future, and that's why we are very focused on that contribution margin development. Of course, during the pandemic, as I mentioned before, we focused on very small tickets, on very diverse risk selection, a careful business, and that's why CM2 margin here the upper line was in some quarters above 18%. Let us start at that chart on the bottom. Here, the development of average ticket size. In 2019 at peak was roughly EUR 9,000.
During the pandemic, it came down, as I described, because of the focus on very small tickets. In Q4, it went up and we would like to come back to a higher average ticket size, but less than EUR 10,000 . I will come back later to that. The second important line here in the brown line is our expected credit loss. That's the expected credit loss we are calculating for each request, for each leasing contract, and we are able to managing that, to measuring that, and pricing in that in our contribution margin and the leasing contract at the end of the day. We see here that the expected credit loss is down to 4.5% compared to 5.6-5.7% in the pre-pandemic level.
That is directly affecting our contribution margin one because for the risk-taking, we price in a risk premium, and that we see in our contribution margin one. It's one driver why contribution margin one in 2021 was 11.4%. Here's also to take into account the rising funding costs, roughly 50 basis points in interest rates means for a duration of four years, average lifetime of a leasing contract of four years and because of the duration, the duration is roughly two years, we talk about roughly 100 basis points in the contribution margin one. In a normal environment, we are able to pass through that higher funding cost to our clients into the leasing context.
It's always a question of time, but take into account in Q4, we accelerated our new business at the same time, and now we are willing to pass through higher funding costs to our leasing business as always in the past. Our CM2 remained at a strong level, 17.6%, above the 17% in 2019, which is a very good level for our business. I would like to take the opportunity at that chart to give you a small outlook, a bit of flavor, what is the structure of our steering the business, of controlling our business in the future, and what are the, let's say, levels we would like to achieve within our new business acceleration over the next quarters on a midterm outlook. Let's start again on the bottom.
The average ticket size will remain lower than EUR 10,000 . We will stick and stay in the small ticket environment. That's quite important. Of course, the EUR 9,000 level is a good and healthy level for our business with a bit more volume, with increasing also direct business. We will see an increase at that average ticket size. At the same time, as we did in Q4, we would like to succeed to taking a bit more risk, to taking more risk, pricing that in. We are knowing of our clients, we are knowing the objects, we are knowing the payment behavior.
Our instruments to measuring risk are very good and very valid to doing that and pricing that in our contribution margin and leasing contracts. That will bring us at the end to CM1 level of roughly 12% with today's circumstances, a level above 12% when we are able to pass things through the higher funding costs, as I mentioned, or funding costs will normalize. We assume from a midterm run to coming back on a CM1 level as it was pre the pandemic. To take into account again, that's directly linked to the expected credit loss when we are more risk-taking, we were getting and pricing in a risk premium, and that will drive also CM1 ratio.
Overall, we guess that a 17% CM2 level as it was in 2019 is a very good fund to accelerating business on the one hand and to being profitable in the future on the other hand. Of course, we are aware of that we need also on the second part of our P&L to look into the cost too. Having a scalable business and costs should not rise in the same way like new business will rise. That's the only way to maintain our strong profitability, our solid financial strength we had, we have, and we will have into the future. Because that strength was one of the keys for our successful financial years during the financial crisis. We would like to look to our P&L.
Looking at that, I have to point out one figure that's the impact on viafintech sale. You are aware of that with a net impact of roughly EUR 23 million. The net interest income figures are in line with our expectations because leasing receivables went down because of the lower new business during the pandemic. Profit of new business and service business are more driven by running contracts. The number of running contracts were a bit less down than the interest income. The costs were higher as it was in the year before, especially driven by the first half of the year because of the extraordinary audits and the extraordinary costs at that audit, and also some extraordinary impacts in the first half of the year in the personnel costs.
We would like to go forward, as I mentioned before, with scaling our business and taking care for a good and healthy cost-income ratio. Overall, that brings us to the net profit of 95.2% within the viafintech sale. Let's now look a bit more deeper into the settlement of claims and risk provisions on that chart. Here we see the perspective from the balance sheet per end of December last year, and you are aware of the 3 stages we have in accordance to IFRS 9. Stage one, there is a 12 months expected credit loss calculated and booked as a risk provision. Stage two is a lifetime expected credit loss for the rest term, the residual term of a leasing contract.
In stage three, all contracts are booked like a damage, and the smaller portion here, the EUR 20.5 million, is for running contracts. Means contracts which are not terminated, they are full running, they are also paying. There was in the past a missed payment more than 90 days, and so it's like a damage. The green portion here of the bar in stage three, that is for our bad debts for the non-performing loans. The structure is quite careful in respect of the situation because of the pandemic, of the macroeconomic parameters. All that things are reflected there. We have a very good ratio for risk provisioning. I would like to point out another thing here. The payment behavior over the last year of our clients was very strong.
We have a missed payment rate over the last quarters of 4%. It's less than a normal rate. Pre the pandemic, that was 5%. You know, in April 2020, with starting the pandemic, we had the peak there of roughly 10% missed payment rate. Since that we are there in a more or less normal environment, a solid, robust, and valid portfolio we are having. That brings me to the loss rate, and the goal was to having a loss rate less than 2%. The loss rate here now was 1.6% for the last year is a result of that what I described, the very good payment behavior, the robust portfolio. Of course, we saw that two slides before, the expected credit loss for the new business portfolio is lower than before the crisis.
That overall brings us to lower loss rate as expected at the beginning of the year. Also the outlook is nearly there in that range for our existing portfolio and also taking into account the new business we would like to settle. On that now I would like to make another point in accordance to the NPL ratio. I know that many of you are calculating that looking at our balance sheet. When you look at the gross NPL ratio, we are talking today about roughly 10%, the gross non-performing loans compared to the overall loans we have without risk provisioning. We think that is a peak during the impact of the pandemic or because of the impact of the pandemic.
There we will see more or less a normal level over the next quarters. Depends a bit on the new business development, of course. To compare that with the last financial crisis we saw in our books, 2009, there we had a NPL ratio of roughly 14%. That again shows us that it is a very robust portfolio. Our instruments we did, our action we took were very successful. Especially the deferral program we implemented only roughly 15% of the former 50,000 leasing contracts was a deferral where it became a damage. The rest of that is fully paid back or now in the payback program. Only 15%, and I think that's a quite successful thing to helping small medium enterprises to come through the crisis.
Yes, also in our cash flow statement, you see that the cash flow, the payments from lessees is quite stable compared to the fiscal year 2020. Here EUR 2.3 billion. Overall, we're having a net cash flow taking into account the leasing cash flow and the repayments of refinancing of roughly EUR 1 billion. That's a strong substance we had and we have in our portfolio. We are able to fulfilling all our repayments for funding because of our existing portfolio and the repayments from leasing. Overall, the cash flow here of operating business slightly negative is roughly EUR 72 million. Because of the strong liquidity we had at the beginning of 2021 and we have at the end of 2021, it's not really a matter.
With EUR 850 million we have a very strong liquidity position looking into the future and going further for new business. On the next slide, we see a bit more about several views to our capital ratios. Here four of them, the most important. The first, the balance sheet. On the left side you know that 16% is a long-term target. Of course it was always the case. We are talking today about 19% capital ratio, quite strong and enough buffer to our target ratio. That's the IFRS balance sheet. The second bar, the blue one here, we call that economic capital. There we include and add to our IFRS equity, our embedded value. I will come back to that later. But from that perspective, we're talking about an economic ratio of roughly 23%, quite strong structure in our business.
The next one, you know that, Michael mentioned that, the supervision related regulatory capital ratio, there we're talking about a capital ratio of roughly 19.8, roughly 20%. We have to take into account here the full Tier 1 capital ratio we have to fulfill the 10.5%. You are aware of that's including the SREP adjustment we're talking about of 1.5 basis points. The 2.5 we pointed out here, that is a capital conservation buffer as it was in the previous periods. That brings us to 13% overall capital. The 10.5 is Tier 1 capital ratio we have to fulfill. An overall capital ratio is 13%. You see that here there's enough space to 20% to going forward with our new business goals.
Standard & Poor's related capital ratio. It's quite good link to the requirements from the supervision. Our goal here is roughly 15% risk-adjusted capital, because that is one of the main drivers and most important things for our BBB+ rating. Not the only one, but one of the most important. Here we're talking about roughly 21% as of the end of December last year. Also a very strong ratio and enough buffer. I talked about the embedded value on the previous slide, and I would like to give you a bit more flavor and combine that with the projection of our portfolio, of our existing portfolio. We are talking here only about the existing, the settled portfolio without new business.
Each new business we are settling, we settled over the last 2.5 months, would come on top what I'm talking about now. Here we see our leasing receivables in the bars over the next 5 years, starting with 2022 from the existing leasing portfolio. In the bars you see several colors, and we split the bars into the new business years where the leasing receivables is from, means when the contract of that leasing contract behind the leasing receivable was settled. The smallest portion is 2017, because it's long time ago, when we're talking about a two year duration in the portfolio and the biggest bar is 2021, and that will run down in that we see here. Overall, and that's a quite important information and message linked to the embedded value.
There is an interest income settled of roughly EUR 600 million. For that calculation, we implemented a loss rate of 1.5% as a long-term average and something like a long-term goal for our loss rate in a normal environment. That EUR 600 million is contracted interest payment you will not see on our balance sheet today because that interest rate which is responsible for that interest income is the discount rate for our leasing receivables and so the net present value of our leasing receivables shown in the book under IFRS reflecting that internal interest rate. The next important part on the bottom here is our funding. You know our funding mix, we will come to that on the next slide. Here we split it out the bars because of that funding mix.
Not the years like in the upper chart. Here we're talking about the senior unsecured and bonds in the blue one, gray one deposit business in Grenke Bank and the asset-based funding in the green. That is directly linked to our leasing receivables. As always, no maturity transformation. You see that in the chart, it's one of our most important principles in treasury business. Here are contracted roughly EUR 150 million interest expenses on that book. That's contracted because it's more or less fixed income. There's no interest change affecting our business because we're having a fixed interest rate in our funding, or we are covered by derivatives for that. That is more or less a fixed expense we settled for the existing business. That, after all, brings us to roughly EUR 450 million outstanding interest income.
It's a hidden value, it's an embedded value. You can call it like you want, and that is one of the main portion of our embedded value. The embedded value as of end of last year, EUR 1.6 billion. The main portion here, the interest income, as I mentioned, of course you have to add a bit risk provisioning, but because of the expected credit loss we have to book under IFRS 9, it's not a huge portion. We have to add the outstanding service business and of course the administration costs for rundown for settling that portfolio. Overall, EUR 1.6 billion, including our equity and including the tax impact on the outstanding income. That means from our number of shares today, 34.4 EUR per share. That's a substantial value in our book we have without new business.
Each new business will come on top. EUR 34.4 per share, our embedded value per end of the last year. I talked about the funding mix. You know the chart, and it's quite important for us to having several pillars and several instruments in that funding boxes. That was one of the main drivers for our success over the last two years, also in that crisis, to being aware of the capital market and senior unsecured funding and bond funding, to having asset-based programs. Here's a green box in place. But also our Grenke Bank, very good access to liquidity, a very cheap access to liquidity. One of our main competitive advantages, especially in not that easy times in the capital market, when you have no access to the bond market, when there is no liquidity in the bond market.
That's a very important pillar of our funding that brought us a good liquidity position during the last two years, and we would like to succeed that. That brings me to my last chart today. A look to the landscape of Grenke, especially looking here to our franchise companies. That's the landscape. You see Grenke more or less across the globe, and also the franchises are more or less across the globe. We're talking from Sydney in the range to Vancouver, so very wide. Also the takeover is quite complex. We're talking about several countries, and Michael mentioned that we would like to take over the company that year, would like to fulfill that.
After the ending of the BaFin process with the measures, the action they took after today's presentation of the full year result for 2021, that is the focus for us in doing that despite accelerating our operating new business to fulfilling our results. As we see here, the global footprint of Grenke is driven by Grenke subsidiaries, by established markets, and also by our franchisees. The future way of growth, and especially the long-term growth, will be driven by our established markets, by our today's core markets, but also by the newer markets we are in with our franchisees, especially the U.S. market, Michael mentioned that. Now we would like to come to the short-term outlook. Michael, I would like to hand over to you.
Thank you, Sebastian. Ladies and gentlemen, as you have just heard, Grenke delivered all its communicated targets despite the difficult environment we had to face. Also, with our ongoing efforts for excellence in compliance, we think that the issues in this area can clearly now be classified as over or past. Now, in the month ahead, we intend to return to strong growth. We aim to deliver sustained double-digit growth again, something that our stakeholders, and especially the investors of Grenke, had been accustomed to for decades. As we continue to invest in our digital and compliance capabilities, our goal in 2022 is to generate a net profit of EUR 75 million-EUR 85 million, a new leasing business in the range of EUR 2 billion-EUR 2.2 billion. This growth shall continue in the financial years to come.
With these targets, we are setting out on our journey well aware that we still have many challenges ahead, even in 2022. That said, we will leave the base camp in 2022 and start the ascent in 2023. By 2024, we will have proven that we are successfully scaling our business model. Based on the assumption that we will achieve this, we have already set ourselves the next major milestone to double today's level of net profit and new business by 2024. This target stands despite the war in Ukraine. We condemn this attack and support the sanctions. As pointed out earlier, fortunately, the conflict has no foreseeable direct impact on our operating business. As a traditional asset financer, we would have been quite resistant to some of those more indirect effects.
Our business model and funding mix make us relatively immune to interest rate and inflation increases. This means we are well prepared to embark on our future path. Clearly, that brings momentum and motivation back into the whole organization, and hopefully also leads to some additional excitement with you as investors and analysts. In days like these, this also sends an important message. With our know-how and energy, we have every opportunity to double our business and achieve our targets. Ladies and gentlemen, as I had stated upon my arrival at Grenke last fall, the details of our growth strategy will be explained shortly at our capital markets update. I would like to ask you to stay tuned for these details in a few weeks. For this reason, I will now only briefly address the questions of how we want to achieve these targets.
In principle, the answer is simple. We will expand our global presence as well as our product portfolio and our service offering. We can achieve this surge in growth by building on Grenke's historical strengths and USPs, while at the same time leveraging our business opportunities at a faster pace. We intend to again grow along in line with the projected development of our core markets and feel that in some markets, we can increase our market share even further by building on our traditional strengths, which includes our outstanding proximity to customers above all the freelancers and small to medium-sized enterprises, so-called SMEs, as well as our unique international network of specialized resellers, our distinct industry product and partner know-how, and our unmatched understanding of efficient, convenient processes when it comes to the small ticket business.
In the segment of small ticket leasing up to roughly EUR 20,000, we are already financing the operating business of small and medium-sized enterprises who make the backbone of the European economy. This has always been our core market. Grenke is currently operating in 33 countries around the globe. One of our newest and most promising markets in the medium to long term is the U.S., the USA, the largest leasing market in the world. The sum of all this makes Grenke unique, and this is the basis for our innovative ideas on how to further develop our business model. Because one thing is sure, our business model is uniquely flexible and scalable. Flexible because it enables us to finance almost any object our customers need for their business.
Whereas in the past, this meant answering machines, computers, and printers, and in the future, it will also mean laptops, robotics, and 3D printers. Also, new objects will also emerge in segments where we already have strong position, such as medical technology. Grenke will also be there to support customers in mastering the green transformation. Grenke's business model can and will continue to be scaled into new market segments and new markets. Now, ladies and gentlemen, our future growth pillars are flexible new products, smart services, and scaling our country presence. Beyond this, we want to ensure that we continue to be highly profitable and intend to do everything possible to defend our cost leadership, even with the rapid growth we have planned going forward. We will continue to digitize our internal processes and streamline them on a systematic basis to ensure their efficiency.
As I mentioned earlier, ladies and gentlemen, the details of our plans will be presented at our first capital markets update on May 13, which you are warmly invited to. Until then, I again ask you for your patience. You may have noticed that we have set our sights firmly on the future and are leaving the past two years behind us. This was a very short but difficult episode in Grenke's more than 40 years history of success. Going forward, our focus will be dedicated on 100% to our goal to doubling our profit and new business in 2024. On that note, I would like to thank you very much for your interest today and attention, and give back to Anke Linnartz.
Thank you for your presentations. We are now ready to enter our Q&A session. Once again, to register for a question, please press star one. The first question comes from HSBC, Johannes Thormann. Please.
Good morning, everybody. Johannes , HSBC. Three questions, if I may. First of all, in terms of your net interest margin development, we saw a steep decline in Q4. Is this now the sustainable level, or do you expect a small recovery or a continued trending down of this in the next years, a different mix of the business, probably less risky markets or whatever. Then in this correlation, of course, the loss rates has also come down. Can you elaborate on what you think as a loss rate for the next years is it around the 160-something we're seeing now back to the 150, which was the historic loss rate?
Also in terms of absolute risk costs, will those risk costs on your top level decline, or should we still due to the increased asset base expect a stable or even rising absolute risk cost level? Last but not least, just on the usual effective tax rate, what is your outlook for the next years, please?
Yes. Michael, I would like to.
Yeah.
Take the questions.
Basta for you.
Welcome, Mr. Thormann. Good to hear you. At first net interest margin. I hope I got you right. You mean CM1 margin, and that's right. As I mentioned on the slides, of course, on a yearly basis, not on a quarterly basis, you're right, it came down. We had two impacts, especially in Q4. On the one hand, we accelerated new business. You would like to come back to that, and that was quite important. At the same time going for higher leasing conditions. It's not that easy to pass through higher funding costs because we had that higher funding costs, we've seen that higher funding costs and pricing that in our leasing conditions on the one hand, but especially in our CM1.
Of course, we have to take into account because of the high liquidity we had and we have, but the leasing receivables came down because of the lower new business of the previous years. We have also to price in, and it's priced in in our CM1. The cost for liquidity, we have to pay 50 basis points on the Deutsche Bundesbank account. To give you a bit of flavor, in the last year it was roughly EUR 4 million negative interest rate because of our liquidity. In the year before it was roughly EUR 3 million. That also impacted the CM1 ratio. With accelerating new business, with expansion in volume, we are able to pass that through.
We think that also in today's figures, it will be a bit of a run, so it's not a question of one quarter or one month. We feel comfortable to bring up the level of CM1 back to the 12%, as I mentioned. The loss rate came down. That's right. I think the level of 1.6% is a good, healthy level. Not that easy to look forward because of an overall development and the macroeconomic impacts maybe the Ukraine war could have, should have.
Overall we're seeing that our loss rate is very robust and under normal development we should see a loss rate nearly in that area, not in the area of 2%, closer to 1.5% as it was in the past. For the future depends on new business because we would like to take more risks that will affect also the loss rate a bit, but also the income, the net interest income, the interest income on the other side. I think the guidance for the loss rate is quite okay in the area of 1.5%. The absolute level of risk cost we've seen today, I think is good, is careful. With normalizing and macroeconomic parameters, I think that should come a bit down.
The ratio of risk provisioning should be a bit less than under today's perspective. Within all the macroeconomic parameters it's careful but also fair, seeing that. From a long-term run, I think the ratio should be a bit lower than we see today. The tax outlook is always not that easy to say, but 25% roughly is a fair tax rate for our business structure we have for the countries where we are. For the last year we have to take into account the viafintech FinTech impact, because there's only a low tax impact of that. 25% is a fair number going forward.
Thank you.
Okay. Thank you. Roland Pfänder from ODDO, please.
Yes, good morning. Two questions from my side please. Firstly, could you touch on supply chain issues? It looks like that there's a new wave of problems accumulating in the market. Looking at China, for example, do you think you will be impacted by this going forward, and what could be the impact there? Second, also looking at the geopolitical situation, what do you think is the investment spending needs or willingness of your clients currently? Do you see any change in late March now? Thank you.
Okay. Yeah. Supply chain, of course. Yeah. Well, yes, also we are still affected by the supply chain bottleneck, especially in the IT and also office.
Technology, that's a fact. But as we see in the fourth quarter and now in the first quarter, we are well on track. It's still a problem also for us. But we are managing, I think, really well at the moment. What regarding the crisis, the economic consequences, in such times of uncertainty, of course, everything could happen. But we build our assessment under the assumption that there will be no doomsday and no decline in Western economies. Please keep in mind that in an environment where liquidity and financing is short, leasing and asset finance is out of the view of our customers, very attractive.
If it comes to investments, you will not go to your bank, you will put your hand in your bank account, because that is you need it perhaps for better times. To have liquidity is key and critical. It's very important to have products like leasing and renting at the moment, more important than ever before.
Okay, thank you.
Okay. Marius Fuhrberg from Warburg Research, please.
Yeah. Hi. A couple of questions from my side. First one, you shared that your credit loss went or developed downwards over time, especially over the past quarters. Could you elaborate a little bit on that? So is it more changed macroeconomic assumptions, or is it that you see lower, like, micro risk indicators from your portfolio that lead you to that? Secondly, on the risk provision, provisioning you built in 2020, did you already dissolve some of that that was not needed 'cause your contracts became healthy again? Or do you still carry forward a big amount of that, or was that actually needed for losses?
The third question from my side would be, with regards to the implemented processes and measures after the short check, did those implementations affect your cost income ratio in the long run, or do you think that this kind of dissolves in the ongoing just business?
Yeah. I would like to go to answer the question. Thank you, Mr. Fuhrberg, for the question. Yes, credit losses and declined, it's not really a macroeconomic assumption. It's more micro looking to our portfolios. I tried to mention we had a very stable payment behavior of our clients talking about a mispayment rate of 4%, less than the pre-pandemic level of 5%. Also the cash flow we saw is quite stable, so our portfolio is quite robust. Also the new portfolios, it means the new business over the last two years because of the risk selective sales approach we did is quite healthy. We did not see any trouble in terms of bad debts, damages or something like that over the last year.
It was more or less like it was expectable. The level of risk provision, when you look to that, it's nearly the same. It's for bad debts a bit more. For some cases we dissolve for especially the deferrals we had and which are running now successful. On the other hand, for the bad debts, we had a bit more risk provisioning at the end of the day. It's more or less stable, I would like to say. As I mentioned before, we are careful also in 2021 because the overall pandemic impacts and also the macroeconomic environment. It's not that easy to looking forward that and that's why we are sticking to a more or less careful risk provisioning also in 2021.
The long-term impact because of processes and action we took after the special audits, I think from a long-term run that will not impact our cost-income ratio. Of course we have to invest in structural and processes and from a year's basis, I would like to say roughly EUR 3 million-EUR 5 million. That cost to being more careful in compliance, being more careful in anti-money laundering. That's quite important. It was a question of time because Grenke was big in 2019. We would like to come back to the EUR 3 billion level. As a big company, as a company under supervision and a stock listed company, it's a need to fulfilling that. From a long-term run that will not affect the cost-income ratio really.
Okay, thank you. We have another question.
Thank you very much.
Deutsche Bank, Mengxian Sun .
Yes, hi. Thank you very much for taking my question. Also several questions from my side. The first one is the new business development in the first quarter. Could you give us some early indicator how the new business has evolved in this quarter? Second question is on your interest rate sensitivity. Could you provide us a ballpark figure how your net interest income would develop if there is a 100 basis points interest rate increase? The last question is, you mentioned there is a large number of the funding has been addressed here. What is the remaining parts that have not been addressed in your process? Thank you very much.
I would take the question number one. Yeah. New business in the first quarter is well on track like it was in the last quarter of last year. Our figures we will bring on at our investors day for the first quarter, so it's a little bit early for it, but we're really good on the way and we see at the moment nothing through the crisis or regarding the crisis. It's well ongoing.
Yes. In terms of interest income, the second question with higher funding costs, as I mentioned before, it was also the case in the past that with rising interest rates, first net interest margin, I mean CM1 came down and over time it's leveled on the same level than before. The CM1 ratio overall is quite stable and we are comfortable to pass that through. That will not from a long-term run impact the net interest income ratio from the P&L perspective on the long-term run. Otherwise, if we would like to calculate it, as I mentioned, roughly 50 basis points is a higher interest rate we are calculating and we are calculating Q4 for our CM1 margin.
You can also, if you would like to, calculate that scenario, add that from the P&L perspective, the 50 basis points on the former yields and rates we had for our funding. The third question, I'm not 100% sure if I'm right, so I would like to ask you back. I got the point that you would like to ask about funding, which has not been addressed. What the meaning of the question, can you repeat that, please?
Yes. It's regarding the BaFin findings. At the beginning of the slide that you said large part of the findings has been already addressed and you take some measures and I'm just wondering what the remaining parts that you have to do.
Okay. It's all the measurements are more or less a process. It's not a one-off measurement to say, "Okay, I do that now and then it's over." It's more or less a process to implement processes for compliance, for money laundering prevention and so on, and that is ongoing. Of course you need also like a cyclic when you will have your internal audit, then internal audit has also to go through all the new processes to the new business we did under our new processes. That will need a time and like a sequence of a year or one and a half years. Everything is ongoing. There's no measurement, no action outstanding. Everything is ongoing, is under process, and so there's no thing which is not addressed.
We established a new compliance concept. We hired high quality people and we implement the things into the company and that is ongoing through 2022. Are we on the way?
Thank you very much. Very clear.
From Kepler Cheuvreux, Mr. Lukesch please.
Good afternoon. Three questions from my side as well, please. First, regarding the 2024 targets, at what amount do you see volume of leased assets, lease receivables basically attached to that? What is the equity ratio you would expect in 2024 based on the plan? Maybe linked to that question, you mentioned the franchise company acquisition. Maybe you can give us a ballpark number or a range at least, you know, where you see the impact on the equity ratio. Secondly, on the residual value risk, I was just wondering, in your annual report you stated that this has increased or basically you widened the range from last year, 5.5%-15.5% to 1%-25.5%.
I was just wondering, you know, like what an impact this has and, especially with regards to the lower loss rate of 1.5% or the 1.4%-1.7% guidance you're giving, and how this matches also with regards to the acceptance rate. Maybe you can, again, guide us a bit through the thinking of applications which are then accepted. Now the level is for the first time at 50%, I think even, and how this channels through to your loss assumption that you basically have going forward. The very last one on the margin, and I'm very sorry if I didn't catch that properly with the first question.
I think in the past you were quite convinced that you could pass through the higher funding costs and then you could basically increase the asset margin. Do I understood that correctly, that you
Still try to pass it through, but that there are doubts with regards to the next one to two years? Thank you.
Yes. Maybe I'll start with the last question and go in the other direction. At first in terms of funding costs, there are no doubts, especially for the long-term or mid-term run to power things through. It's always an exercise more or less from a short-term run, talking about months because we would like to accelerate significantly our new business and has to pass through higher funding costs at the same time. That is an exercise, but we are doing that. We started that in Q4 and also in the running quarter, and we are confident that that will happen, and we are able to do that. There's no doubt from a long-term run over the next two years.
The lower loss rate 1.5%, and I hope I got the second question right. There were many things and many numbers or KPIs in that. In terms of the acceptance rate, of course, when we looking to our acceptance rate in terms of the request, we're steering the business for on the basis of our contribution margin calculation. You know that for each request we are calculating that contribution margin one, expected credit loss contribution margin two, and that's one of the main decision-maker for that. Of course, the acceptance rate and let's say the risk appetite, the risk we would like to take and to be priced in will affect also the loss rate at the end of the day.
As I mentioned, we would like to come back to a risk level of 5.5% roughly, and that will be meaning at the end of the day, a loss rate as it was in the past, roughly 1.5% looking to the P&L at the end of the day. Today, in the new business, the expected credit loss is lower, with roughly 4.5%. The long-term targets or what is linked to the KPIs, and I think we will give you more flavor on the capital markets day. Looking to those two figures you mentioned, when we look to the lease assets value, an important figure, especially for the number of running contracts, it's clear calculating that we will have a volume of leased assets above EUR 10 billion.
With that goals we have with that accelerating of new business over the next three years. From an equity perspective, it's not that easy looking forward. When you take that into account, the new business development and our strong profitability, we have a stable payout ratio of roughly 25%. Then you can say that will be an equity ratio of roughly 18%, and that includes the impact of the franchisees. That's also not that easy to point out, but 18%, I think from a long-term run, could be from a balance sheet side. From today's knowing we have, from that funding structure we have, a fair calculation.
Sebastian, I would like
That's very clear. Thank you.
The interest rates and the inflation. In my point of view, higher inflation rates may actually be a boost to some of our products, being able to safely swap from one asset to the other, even if prices are rising in the meantime. For us as owners in such cases, please do not forget that asset ownership historically was a very sound, perhaps the best way to protect against inflation. We see us in a really good position about this topic.
Maybe if you could touch on the residual value risk statement you put in the annual report. What should that tell us? Is that just, you know, like a range for a couple of handful assets, or has there been a major shift basically with regards to that? Thank you.
Yes, there's no major shift. We're always checking our residual value approach, especially for the leasing receivables and under IFRS. That become more and more detailed over the last years or became more and more detailed and also will become more and more detailed because we have a lot of experiences over the last two years in several countries. In five years ago, it was more a portfolio approach overall, and we are going now more and more detail reflecting the several things for object categories for several markets. That's why we see there a bit migration on a portfolio approach. The average is not the same, but the range is wider, and so we are more in detail meeting the expected residual value for each single leasing receivable. From a portfolio perspective, there's no change.
Very clear. Thank you.
Now we'd like to move on to Dr. Norbert [Kalibuda], please.
Hello. Thank you for taking my questions. Good evening. Please, can you give us some advice if you would be an analyst in regards to change in working capital and change in CapEx towards the end of 2022? Or some words about your current liabilities and non-current liabilities to have some more feelings how this year should go for you. Thank you so much.
Yes, I think that's a good idea to look on the chart. We talked about the embedded value, because there you see also the rundown of our receivables, the asset side on the one hand, but also on the liabilities. The first block, the year 2022, that's the development for the current year. We're talking about roughly EUR 1 billion we have to pay because of our liability development. We have also a strong cash flow because of our existing portfolio. The picture there will be the same as it was in the last years. Meaning the need for new funding is a question of new business. For the existing funding, we are covered by our own cash flow we have.
On that chart, you see how the development over the next years and also in the Q1 and Q2, Q4 in 2022 will be.
Okay. Thank you. Thank you.
Yeah. Thank you. We have a question from Pareto.
Thank you.
Dr. Hässler.
Yes. Hello. Philipp Hässler from Pareto. I have three questions, please. Firstly, could you give us the one-off costs for 2021 which were related to the special audits and other stuff like this? Secondly, on your funding plans for the current year, I understand that you expect to pass on higher funding costs, but nevertheless, I would be curious to know what funding plans do you have for the current year, and how do you expect your spread to develop? Last but not least, on your new business target, which is quite confident from my point of view with the current year, at least 18% growth, do you see countries or products where it is where you see particularly large growth, or is it more or less well-spread over product and countries? Maybe you could elaborate on this.
Thank you.
Okay. I will take the first two questions. At first, the cost related to the special audit in 2021, roughly EUR 10 million. It's not that easy to point it directly out what are the direct costs for because of that special audit. But as you mentioned in the past, it was roughly EUR 15 million, EUR 5 million in 2020 and roughly EUR 10 million in 2021. Yes, the funding plan for 2022, we know our funding mix, so we have the best flexibility we could have, especially at that times. Of course, looking forward with rising new business, the plan is to go into the capital market and going for a bond. To be honest, at the moment it's not that easy because of the overall situation because of the Ukraine war.
We are confident that over the year we are able to do that, to make a bond, maybe two for that year. That is the plan. Also expanding the asset-based funding because it's quite important, especially for markets with foreign currencies. There's no currency transformation, no foreign exchange transformation, no maturity transformation that we would like to write. Also, Grenke Bank is an important access for us, and I think with roughly a third of our funding we are well prepared for that. At the end of the day, that is a bit the plan, but at the end of the day, as always, we have to decide in terms of the market and what is possible at the market.
In terms of credit spread, I assume that after the next bond we would like to do and that will be successful. I believe that. Then we will see normal credit spreads as it was pre the pandemic and as it is normal for a BBB+ rated financial institution like we are.
I take the question number three, and I'd like to put it perhaps in three parts. First, for me, in times like these, I think our service and our type of financing is essential and more important than ever before because leasing and renting is liquidity saving. I've said it before, in difficult times, liquidity is critical and key. That means more important than ever. Second, I think is that we see also a long-term trend, leasing and this long-term trend, we see and where we are building on will not fade. Leasing is a growth market and especially asset finance in ESG and health type assets will grow significantly.
As a market leader, we will have benefits from these developments and this will be able to grow also our share. Second, as I think we have a different situation in countries like Germany and countries like France, Spain or Italy, we like to expand our market share. In the new countries like the U.S. or Australia, we like to go and to grow into the markets. Interesting product lines will be ESG, health products, et cetera.
Okay. Thank you very much.
Thank you.
Now from Warburg Research, Mr. Fuhrberg, please.
Yeah, just one follow-up from myself. You just mentioned the U.S. market and, I mean, and the importance for the growth in the long run. Could you give us just a brief update on how things developed over there since you started and, what's your trajectory in the market?
Yes. I will give you a short update. You had started two years ago, so it's a quite young company, and it's always the case. Of course, the last two years were not that easy, also not in the U.S. market. The first exercise always going out, winning dealers, building up a dealer relationship and the dealer network. Not only working with one, two dealers, because we would like to be diverse from the very beginning on. That happened in the U.S., and we know that the product, the service is working, the Green Economy product is working, the credit decision, the fast credit decision for small ticket is working.
It's also a niche like in Europe, like in other countries we know that, of course, the U.S. market is a big ticket market, but our focus on small ticket is absolutely a need for that environment. There are small, medium enterprises investing via leasing, and so our product is working, our service is working, and now we have to do the next steps there to expand our dealer network, to expand our relationships and going forward, to expand the volume at all.
Thank you very much. Now we have a question from Roland Pfänder from ODDO.
Yes. Two follow-ups, please. Could you maybe elaborate a little bit on the needed investment spends on your corporate structures? For example, if I understand correctly, you want to grow more intensively in the U.S., so what CapEx is needed in the midterm for this plan. Secondly, looking at the current year, could you give us an overview of the cost step-ups linked to, for example, wage inflation or other cost items, which will bring up costs for the current year? Thank you.
Of course, the investment needed for entering new markets in our business is not that low, not that high, sorry. It was also not that high in the past because we are going out in a new market with a big bang. We are building up our dealer portfolio. We're using our global software. We are using our approach, measuring risk and then becoming better and better using our own data, our own experiences. There's not a huge investment we did and we will do for developing a market. With growing the business, of course, we need some sales costs. You need some marketing plans, but that's in line with our normal market. There's no extra big or huge investment for developing these new markets.
Looking to the cost impact because of inflation, that's nearly the same, like for each company, for each of us. Of course, we will see higher costs because of the inflation that will impact our staff costs at the end of the day. That will impact the things we have to pay, but we have not that big or huge impact of commodities or something like that. We will see that, and you will see there an impact of, let's say 5%-6% at minimum, because of that inflation. Yes, that's right. I think that's quite normal, and that's a normal development of the market prices.
Okay. Thank you.
Thank you. If there are no further questions, I think we can wrap it up right here. This concludes our today's call. Thank you very much for joining us. If questions spring to your mind after the session, please email to us. Just to remind you, our new business figures are due on April fifth. Have a great day and best of luck. You may disconnect now. Thank you and goodbye.