Welcome, ladies and gentlemen, and thank you for joining our earnings call regarding the publication of our annual figures for 2024. My name is Franziska Randt, I'm head of the IR department, and I'm pleased to say that today here with me is our CEO, Dr. Sebastian Hirsch, and our CFO, Dr. Martin Paal. Welcome. We will start with the presentations, and right after we will enter into our Q&A session. If you would like to ask an oral question, please press the raise button with the hand symbol. Once I call your name to ask a question, we will open your audio line. Please make sure that your device is unmuted as well. You can also type your question in our webcast chat via the Q&A button. With that, I would now like to pass the call on to Sebastian. Go ahead.
Thank you, Franziska, and also a warm welcome from my side. Thanks for joining our earnings call today. First, let me introduce Franziska in the new role of Vice President Investor Relations. All the best for you, Franziska. I'm sure you will support us as you did in the last years, and I'm very happy that you are here today with me and Martin.
Thank you.
Now let's start with our earnings call. Ladies and gentlemen, 2024 was a year of contrast for us. On the one hand, we were able to report major successes. On the other hand, we suffered a setback toward the end of the year. 2024 was marked by an overall challenging operating environment due to a tense business climate, macro uncertainties, and tightening lending standards for companies. On top, and sadly I might add, geopolitical conflicts continue to persist. At the same time, 2024 was also impacted by a steep increase in insolvencies in the middle of the year and an increase which also had an impact on our own numbers. We saw it in the rise of settlement of claims and risk provisions, which impacted our initial group earnings guidance. Our group earnings came in at EUR 70.2 million, so within our last published guidance.
Also, we assumed with the beginning of last year that the loss rate would return to our historical average of 1.5% over the next two years. We did not expect for it to happen so fast already in the second half of 2024. We took immediate action and accounted for it in our P&L as well as in our expected credit loss calculation regarding our leasing new business. Ladies and gentlemen, the major success in 2024 was reaching our EUR 3 billion target for leasing new business. This is not only a new record in our more than 40 years' grenke history, but above all a new level for us. As a global provider of leasing solutions, we have now seen the investments and efforts of recent years as a result of our strategic work in the last year's new business.
In this context, it is important to note that the new business is the source of our future earnings. This is because, on average, a new leasing contract with us has a term of around four years. During this time, meaning during the next four years, our customers' monthly or quarterly payment flow continuously to us. That means a strong new business today is a source for future earnings and profits in the future. Additional tailwind is provided by our very strong contribution margin 2% of 17%. As we move forward, our priority is clear: simplify our approach and focus solely on our leasing business. By taking out complexity, we can sharpen execution and drive sustainable value. Another aspect along our way towards more efficiency is our focus on cost management and our efforts in light of our digital excellence program.
Our cost-income ratio came in higher than expected to 59.2%. More on that later. In the end, our growth path will ensure the scalability of our business. Ladies and gentlemen, our focus is on the enhancement of our value creation, which will lead to an increase of our embedded value and return on equity. The focus of our business model includes three key levers. You see that here. First, our operating income. Second, our operating cost. Third, our risk management. It is important to be aware of these levers looking to our periodical P&L or earning before taxes, but also in steering our new business with the CM2, because there are some early indicators, some early KPIs for our future P&L.
Allow me now to illustrate what the drivers behind those levers are, and let's start with the last one, the risk, which essentially comprises the default risk of our leasing book. What we can see here on this slide is the development of our risk assessment over the last six years. The lower bars, let's start with that, reflect the expected loss calculation in our contribution margin two. It's always calculated for the new business portfolio, and it's based on the total lifetime of this new business leasing portfolio, in average to four years. And it's shown here in relation to the new business volume. The light blue bars show our initial risk assumption, and the darker blue bars show the current expected or maybe realized credit losses, depending on the lease term. We account for each new business year's portfolio.
Important for our risk assessment is to achieve a low deviation between the two bars, meaning between initial estimation and real credit losses. An average is roughly 6%, and for 2025, we expect an initial expected credit loss of between 6%-6.3% of the new business volume. It is in line with our long-term loss rate of 1.5% per annum on average. On the upper lines, we can see this. Here, it is based on the yearly P&L. The orange line graphically demonstrates the developments of settlement and of claims and risk provisions under IFRS on the P&L. There you see the sharp increase in 2024 coming from a very low base in 2023. This development is triggered by macroeconomic parameters as well as by accounting standards.
The dotted blue line illustrates what the level of settlement of claims and risk provisions would have been if the loss rate remained constant at 1.5% over the past six years. What this shows clearly is the fact that last year's increase to a loss rate of 1.3% in year's average is within the average of historically normal levels. At the beginning, as I mentioned before, 2024, we expected a normalization to that 1.5% over the next two years. As we know today, the rise of our loss rate came faster, and we clearly have not anticipated it at the beginning of 2024 when announcing our first guidance for the last year. Overall, nothing out of extraordinary in terms of the historic average of our loss rate. Now, which action did we take after last year's development?
Firstly, we continue to further diversify our portfolio among industries, asset types, countries, remaining true to our core value, which is small-ticket leasing. Secondly, we use the data we gather to improve our decision making. Thirdly, we will steer our business on a lifetime expected credit loss. For the fiscal year 2025, we assume roughly 1.6% in our planning for the yearly loss rate. In the long run, we were seeing that the area of 1.5% is the right one and fair, and that is in line with the roughly 6% expected profit loss on the total period for the CM2 calculation. Let's now move to the second lever to enhance value creation and its cost management. From a P&L perspective, we saw an increase in our cost, and that is shown here in the upper yellow line, its effect.
We cannot deny, and it's due to aspects such as inflation and increase in staff costs because of our growth. What we can also see on this slide on the lower part is that the cost per one unit leasing new business and leasing receivable is improving. We take here all operating costs under IFRS as a counter for the relation. This marks a crucial turning point for us and proves that we are on the right track with measures taken. The purple line shows all operating costs per new business, so to say, similar to the CM2 ratio. With 11.2%, it came down significantly and will continue to improve. This perspective might surprise you, but it's fair to assume that two-thirds of our costs are more or less related to new business. This is also a fair indicator.
Also in relation to the portfolio size, here expressed as leasing receivables, the cost per one EUR receivable came down from 5.5% in 2023 to 5.2%, a development that will continue too. Both measures include the digitalization program and our new business growth. As I said before, growth plays a pivotal role in the scalability of our business. The new business of today is the basis of earnings of tomorrow's P&L. Despite a slightly elevated cost-income ratio, these parameters are clear evidence that we are on the right path to become more and more efficient, despite the high level of regulatory requirements we have to meet. Now let's move to our third lever, our operating income. There we see a significant momentum.
Our leasing new business growth over the past three years has led to a significant increase in operating income, even stronger than our overall cost basis, as shown in the lines here. We expect this momentum to continue in 2025 and beyond. Important to note is that this proves that our efforts of the past years finally start to pay off. The strong new business of more than EUR 3 billion with that strong contribution margin too is still to come in the peak earnings phase. We will continue to grow in CM2 and new business. Ladies and gentlemen, decisive is that the gap between operating income here, the dark blue line, and the operating costs here in the yellow line, that that gap is getting bigger and bigger. This short overview gives you a bit of an insight into the way we think and steer our business.
It demonstrates that we are on the right track, and therefore it's important to remain calm and to continue our path. Our new PNs structure might also be helpful for you to analyze our business whether from an earning before taxes perspective, a CM2 perspective, volume, or cost-income ratio perspective. It reflects in this comprehensive picture of our three key levers of value creation, how we steer the business to increase our return on equity and embedded value from a long-term run. With that, let me now hand over to Martin for more number crunching details.
Yeah, thank you, Sebastian, and also a very warm welcome from my side. Ladies and gentlemen, following the key levers that Sebastian just presented, I would like to start with some important changes that we have undertaken with our annual report before diving deeper into the figures.
Firstly, as already announced last year, we have decided to become a pure-play leasing business, focusing on our core strength, the profitable leasing business. With the divestment of our factoring segment, this decision will materialize soon. Consequently, we have decided to organize our business by regional segments along our leasing business. You may know these segments already from our new business reports, and I'm certain that the new segment structure will provide better insights into the performance in our markets and underlines our focus on the leasing business. Secondly, we choose to adjust the structure of our P&L as follows. As of this year, we present the settlement of claims and risk provision and goodwill impairment as separate line items below the operating result. This provides a direct link between our operating income and operating expenses, so the operating performance.
It also allows you to directly derive our cost-income ratio from it. The cost-income ratio then becomes very easy to calculate, dividing our operating expenses by operating income. Let us now look at our last year's new business performance. As stated by Sebastian earlier, we achieved our goal to surpass the EUR 3 billion threshold for the first time. Very positive about the past year was, together with meeting our volume target, that we surpassed our margin target significantly, reaching 17%. Lastly, our cost-income ratio remained widely stable at 59.2%. As you can see, our new business performance shows a clear upward trend, especially in volume, accompanied by a strong CM2 margin. By surpassing our 2019 new business performance for the first time, we have finally returned on our initial growth trajectory and will continue to grow our foundation for sustainable earnings growth.
Looking at our P&L, you can immediately see the much clearer structure with the introduction of the new operating result before settlement of claims and risk provisions. In the past year, our income from operating business increased strongly by over EUR 53 million to EUR 576 million. This was driven on the one hand by an increase of net interest income of EUR 18 million, in which our growth and interest income overcompensated for the higher interest expenses. Further, our profit from new and service business, including profits from disposal, grew strongly by about EUR 35 million. The increase in total operating expenses by EUR 32.1 million was within our target corridor for the past year, mainly driven by anticipated higher staff costs related to our overall growth. Consequently, our operating result before settlement of claims and risk provisions increased by around 10% to EUR 235 million.
However, settlements of claims and risk provisions were significantly higher than anticipated in 2024. The additional EUR 40 million were caused by the sudden increase in insolvencies among our customers since the third quarter of last year. Additionally, the impairment on the goodwill of our Spanish subsidiary of around EUR 4.4 million impacted our other operating income. With an operating result of EUR 90 million, we reached group earnings of EUR 70.2 million, well within our adjusted guidance corridor. On the next slide, we show you the risk provisions and impairments we accounted for according to the three levels of IFRS 9. What you can see is that the total risk provision for lease receivables increased roughly by EUR 40 million in fiscal year 2024. The increase in risk provisions in level one is directly related to the increase in volume of lease receivables.
The decrease in risk provisions in level two was mainly driven by the materialization of defaults. That means that contracts moved either from level two to level three or were entirely derecognized, and provisions were used accordingly. However, the overall increase of risk provisions resulted primarily from level three. This was mainly due to a continuous increase in the number of defaulting contracts and insolvencies, as just mentioned. Finally, this led to a much quicker normalization of our loss rate than we initially anticipated. With a loss rate of 1.3% for the whole year and 1.5% in the last two quarters of 2024, we have decided to cautiously adjust our models and guidance to reflect the normalized level. Let us now take a look on our cash flow statement.
In 2024, the growing new business of the previous years is reflected well, as payments by lessees were up by about EUR 174 million, reaching EUR 2.6 billion. At the same time, we successfully added EUR 3.5 billion of new refinancing driven by our two benchmark bonds, as well as EUR 611 million of bank deposits. With this, we invested EUR 3.1 billion in new lease receivables. Cash from operating activities accordingly reached EUR 394 million, which resulted in cash and cash equivalents at the end of fiscal year of EUR 973 million. The strong increase was mainly driven by the most recent benchmark bond issues. With this strong cash position, we are confident to be well equipped for our continuous growth path in our leasing business. Lastly, let's have a quick look at our funding mix. By the end of 2024, senior unsecured accounted for 40% of our funding.
This pillar was mainly driven by the successful issuance of our two benchmark bonds in March and September. As shown in our cash flow statement, Grenke Bank also saw strong inflow of deposits, reaching a total of EUR 2.2 billion by the end of 2024. Our third pillar, the ABCP programs, reached 15% at EUR 1.2 billion at the same time. Moreover, it is also worth mentioning here that we just replaced our previously outstanding three AT1 notes by a single AT1 issuance of EUR 200 million, and this further strengthens our equity position. Overall, we are well equipped with our funding mix for our continuous growth ambitions, and the solid mix of our pillars will continue to allow us to respond flexibly to change in market conditions and to utilize funding opportunities when they arise. With that, I would like to turn the call back to Sebastian.
Thank you, Martin, for guiding us through the figures and numbers. Ladies and gentlemen, the past years have been challenging, without a doubt. At the same time, and I'm proud of what we have accomplished in these years, we had achieved a lot. I'm confident that all the steps we took, all these challenges we tackled, all measures we put into place have put us in the right position for this moment, a moment which is marked by an important turnaround momentum. This track record we've shown here is reflected in our figures. Most importantly, I would like to emphasize growth is the key to higher profitability. Again, I would like to repeat our goal. We want to grow our embedded value and our return on equity in the long run. This goal is also reflected in our guidance and how we steer grenke.
We saw the outlook for some figures in the first part of my presentation and the charts, which point into a clear direction. We steer by our three levels of value creation, operating income, operating costs, and risk management. We want to continue to grow for this, and we need a solid funding base through our three refinancing pillars, as Martin just showed, strong conditions through our CM2 margin of above 16.5%, and an enlargement of our international market share through partnerships such as with Intesa Sanpaolo, for example, or organically through new business, new branches, new object categories, and new resellers. On our profitability side, a key factor is our cost management. Here, we will increase efficiency through our pure focus on leasing and our digitalization program. The other important factor is an accurate risk management.
This does not mean to avoid risk completely, but to measure, analyze, and price risk properly. The vast amount of data we continue to collect will help us in our risk assessment. Our estimated loss rate of around 1.6%, as mentioned at the beginning, is not only in line with our historic levels, but also reflects our expectations for this year in light of the macroeconomic circumstances and our CM2 target. All the before-mentioned KPIs will be the basis for our double-digit leasing new business growth. For that year, we will grow to between EUR 3.2 billion-EUR 3.4 billion, and our group earnings should come in between EUR 71 million-EUR 81 million. For sure, with an equity ratio of around 16%, we see ourselves well equipped for 2025 and our growth path. Ladies and gentlemen, let me assure you, we are on the right path and on track.
Sure, the macroeconomic environment is volatile and challenging, but we can and will tackle it. We see an unbroken demand for investments. Our customers want to become more digital, more sustainable, and more competitive. Leasing is and will be a catalyst for small-medium enterprise investments. We have proven for many years that we are able to outperform the European leasing market, and we will continue this path. Our digital excellence program is well on track. With it, we are creating a leasing ecosystem for our customers and partners. Our customer-centric approach puts convenience, usability, and speed at the heart of our efforts. Because in the end, most important are our satisfied and happy customers. We aim to make leasing as easy and accessible as online shopping. With the investment of the factoring business, we stay true to who we are, the leading small-ticket leasing provider for small-medium enterprises.
This is what we are best at, and our strength lies. We will continue on our growth path, utilizing our strength and expanding globally. Thank you very much for your attention.
Yes, thank you very much, Sebastian and Martin, for your presentations. We will now enter into our Q&A session. For that, if you want to ask an oral question, again, please press the raise button with the hand symbol. Once I call your name to ask a question, we will open your audio line. Please make sure that your device is unmuted as well. You can also write us in our Q&A session in the webcast if you would like to have or ask a written question. With that having said, I would like to give Johannes Thomann of HSBC the first question. Just a second there, we will unmute. Yes, Mr. Thomann, you can now speak.
Good morning, everybody. Johannes Thomann, HSBC. Some questions from my side. First of all, on your outlook, we have now talked about growing your business again, but you continue to shrink your profits now for some years in a row. Are you just growing your top line without really getting down to the bottom line? Secondly, how reliable in this context is your new net profit guidance after the several cuts we've seen in the past? The market is also not happy with the guidance. Last but not least, probably from my side, the equity ratio is at 16.1%. How likely is a capital increase for the next years? Thank you.
Yes, thank you, Mr. Thomann. I will take your questions. At first, for sure, you are right with the things you mentioned.
For us, top-line growth is very important to improve our base for future earnings, as I mentioned. Our new business of today is, for the next four years, the future earnings. You see that a bit in the chart I mentioned for the operating income, that the growth and the new business of the last years is part of our today's future earning, and continuing growing is very important for that. In terms of bottom line, when you take into account the cost in relation to the new business, that relation came down and will come down in the future. That is also an expression for our future profitability. At the end of the day, our path is quite clear. We would like to continue growth, and we will also achieve growth in our profits.
The last years were not that easy, for sure, with several circumstances. First was the pandemic and the short attack, several audits last year with the macroeconomic dip because of the insolvencies. Now we are well prepared. To the guidance of today, of course, our lesson learned was also to make a guidance in a situation like this with a 1.5% or 1.6% loss rate and not lower. I think it's a reasonable guidance, and we are confident to achieve that guidance in that environment where we are within our new business growth, within improving our digital excellence program to make grenke fit and proper, so to say, for the future as well. Capital increase, it's always a question of growth speed and acceleration in growth. With a growth rate of roughly 12%, it is like it was in the past.
We are well covered with our equity. We have also some other opportunities, maybe with an AT1 bond in the smaller portion. I think it's a thing we have to decide through the end of the year when we see, okay, how was that year running with a new level of EUR 3 billion new business, with double-digit growth on a EUR 3 billion level, and what is the growth pace for the upcoming years? If we would like to grow faster, some capital increase is necessary. From today's perspective, the goal is to increase new business of an average 12%, so to say, with a good contribution margin 2. Then we can achieve also a very good return on equity at the end of the day.
We have a question from our chat that I will read aloud.
Since IPO in 2000, grenke had return on equity in mid-teens and even close to 20% in 2018. In 2024, return on equity was around 6% and was at the lowest level in company history. Similar to ROE, it's guided in 2025. Do you expect Grenke would return to historical mid-teens ROE in the mid or long term, or has grenke become a structurally lower ROE business?
Also, thanks for your question and for providing us with the detail. You're absolutely right. From a long-term run, we expect that we can see a double-digit return on equity. That's our goal, but we need to go that path we are going now. The investments in digitalization was and is important. The investment in our structure, in our governance, was important.
It is important to bring up the new business, to achieving growth on that level, and to becoming more and more efficient at the cost levels we have shown coming down, that the cost-income ratio as a result of that becoming better. We can achieve also a return on equity in the double-digit range.
We have another question coming from our chat from Mr. Assadollahzadeh from Richtwert Capital. He says, "I understand the effect of current insolvencies, but despite this, the loss ratio is average historic levels. So why is grenke not more profitable despite leasing receivables increasing strongly for three years at increasing CM2 margins?
What are the main factors, and how do you plan to address these aggressively?
Looking to the last years, and that is also a bit the idea of the P&L structure and the pictures we have shown, is to divide it into three levels. On the one hand, on the operating income side, there you see the significant growth in new leasing business. Operating income is growing. There is also a bit of time lag. You see that in the charts and also in the numbers. You also have to take into account that in our operating income, the portfolio is included where interest rates increased significantly. It was, I think, end per 2022-2023, interest rates increased. There, our contribution margin two was lower because of the time lag. That is now part of our portfolio. Today, we see a bit the other direction. Interest rates came down.
The contribution margin too is a bit higher, and that will be part of our future earnings. On the one hand, in the operating income, we see that new business is paying off in operating income. The second part is the cost structure and cost infrastructure. There we had to invest, as I mentioned before. We are growing, so we need to invest also in our growth, and there is a time lag. As I mentioned in my presentation, roughly two-thirds of our costs are related to new business, to new leasing contacts. The most part of our cost is at the beginning of a leasing contact. The earnings of a leasing contact are coming over the next four years. In terms of IFRS, we have to take into account the first accounting step we always do is expected credit loss calculation for IFRS.
From an accounting perspective, the first day of a leasing contract is not that good because of expected credit loss, your sales costs, and so on. Then over the, let's say, next days until the next four years, you will get your earnings. Last but not least is the risk provisioning and settlement of claims with the fluctuation we've seen, with the volatility we've seen. When you assume from a long-term run, 1.5%, the overall expected loss or the overall risk provisioning and settlement of claims will be roughly the same as we've shown in our P&L. The P&L is working like this because of macroeconomic parameters, because of accounting and timing we have to achieve. What does it mean at the end of the day? Keep calm. We would like to continue our path.
With growing new business, with becoming more efficient, more digital, we will also see more profit and a better return on equity.
Yeah, thank you. We have another question from the chat, which is asking about the successor of Isabel Rössler, who left the company at the end of last year, and when we will announce that or present.
Yes, the process is running, and it's in a good way. I think the supervisory board is doing that, and we will announce that as soon as possible.
Yes, we have several next questions from the chat. Also, it's good that you used that. What do you observe when looking at insolvencies by market, and how is it monthly change? How does it change on a monthly basis?
Actually, what we currently see is what we expected already in the last quarters of 2024.
We see this elevated level of insolvencies still now. We have seen a loss rate of 1.5% in the last two quarters, leading to an average loss rate of 1.3% for the whole year of 2024. We see that in the first months of this year that this trend is not broken. We really expect, or we think that we are well prepared with the guidance of between 1.5%-1.6% loss rate in risk provisioning for this year of 2025.
The follow-up question actually really plays into that direction also by asking if we expect that the 1.6% loss rate should be stable through all quarters in 2025.
The point is that we, as I said, already see higher insolvencies in the first quarter of this year compared to the first quarter of last year.
That will weigh on the P&L in the first two quarters in this year compared to the first two quarters of last year. That is important to mention because you will see higher risk provisioning, especially in the first two quarters compared to last year's two quarters, because we already think that we will see a materialized loss rate towards this 1.5%-1.6% year. Last year, we had 1.1% in the first quarters. This will make a difference in the P&Ls in the first two quarters in this year.
In terms of rate, as Martin mentioned, we currently see that the level is nearly on the same as it was in the last two quarters. It is stable. There is no further acceleration at the moment. We expect that the loss rate will also be more or less on that level.
It depends a bit on the overall development over the whole fiscal year what maybe is a loss rate in the last quarter. We expect that it will be more or less stable.
The next question is regarding new leasing business and how it will grow. The person says that it's below old midterm guidance. What are the reasons for this? How do we look at the different markets? Also, is 2025 a year of transition due to macro being a little bit weak in the person's opinion, or do we expect to grow only so-and-so, quote, in the high single digits also in the future?
No, from a long-term run, we would like to grow in double-digit, 10%-12%. That's our long-term average goal. You're right, the macroeconomic environment is not that easy in the moment.
On the one hand, we see a strong demand for leasing, but it's quite clear in that macroeconomic environment because banks are avoiding risk and giving loans. It's a thing we've seen over the last decades. It's always the same. On the other hand, we would like to take care for our risk assessment. We would like to achieve a strong contribution margin 2. We will price in the risk. May not make each leasing contract. It depends a bit on risk assessment because we put in the data we collect over the last couple of quarters, as we always do in our risk assessment. That's why the guidance from the middle of the guidance seems to be a bit lower. Our ambition is to achieve a double-digit growth also for that year.
That's for clear and the guidance in, let's say, billions at the end of the day. It's a bit of a technical issue. We would like to achieve a double-digit growth, but we would like to have a clear and good risk assessment and a high profitable new business.
We have some questions regarding the fourth quarter isolated regarding the development of net interest income. The person says that its growth decelerated from Q3 to Q4 and also regarding the staff costs and that they have risen noticeably Q on Q. If you just take a look at Q4, is there a particular reason?
Yeah, let me start with the first question on the cost side in Q4.
What we have seen in general is that we have seen higher staff costs because of higher new business and higher costs related to the remuneration in the variable compensation corner because we did a really strong quarter in Q4 in new business. This is reflected also in the staff costs. However, if you take a look at the whole year of 2024, we have seen staff costs increasing by around 12%. That is high, that's right. Half of that is related, as we planned for, by increase of staff by something a little bit above 6%. The rest is related to salary increases or new hires in 2024 overall. The second question on net interest income, there was an effect in the fourth quarter related to our bond transactions, especially in interest expenses, because we had a tender offering combined with our new benchmark issuance.
This is reflected in the Q4 interest expense as well. This weighs a little bit on net interest income of Q4 last year.
Last question also with regards to the P&L about the selling and admin expenses that they grew noticeably year on year. Is there also a particular reason that you can share?
Yeah, the first thing I just mentioned is that is a little bit also what happened with staff costs in the fourth quarter, especially in the fourth quarter, is that we have seen higher selling expenses due to the strong growth we have seen last year. However, most of that has been recognized in the new business.
That means that it is more or less an effect on both sides, on the profit side as well as on the expense side, because all these costs relating to creating new business, directly relating to creating new business, the so-called initial direct costs will be recognized also in profit from new business. Therefore, you have these effects also on the cost side as well as on the income side.
Yes, speaking about costs, our analyst Roland Ffänder from ODDO asked that or kindly asked us to explain the targeted productivity improvements on the cost side going forward and also to provide an indication of our expectation for growth on personnel costs in 2025 in relation to leasing growth.
Yeah, let me start with the productivity costs, which are especially related to the digital excellence program.
That is also part of the selling and admin expenses, especially on the admin expenses side, where we have seen roughly EUR 12 million-EUR 13 million of costs with regard to the digitalization program. That is our transformation into the cloud, so-called cloud services. We call it infrastructure as a service that creates costs. We have also IT project costs that are reflected there in the digitalization program. Also licensing fees in relation to the new, to the program of our digitalization excellence. This is also reflected on the cost side. This is within the target of our EUR 45 million-EUR 50 million that we target to spend on the digitalization program. In last year, EUR 12 million-EUR 13 million. That will also continue in 2025, more or less on the same level between EUR 12 million-EUR 15 million.
Regarding the personnel costs target for next year, as I just mentioned, we have seen some 12% cost increase in personnel costs. We are planning with a little bit less, so maybe around 10% of personnel costs for increase for 2025.
Yeah, thank you, Martin.
It is important to say that on the one hand, let's say roughly 10% cost increase, but the operating income should be clear double-digit growth. As you mentioned also in our chart, that operating income is growing faster than operating costs.
We have a question regarding our collaboration we published just weeks ago with Intesa Sanpaolo and whether we expect more collaborations with banks like we did in Italy in the near future.
First, it is the first cooperation like this, and we will start there after closing. Closing is expected per end of the quarter, beginning of the second quarter.
We will start our business operations together with Intesa Sanpaolo. It is a very new way for us. It is a new channel for making sales. In Italy, we are talking about roughly 120,000 customers of grenke. We are talking about 1.2 million customers of Intesa Sanpaolo. It is a huge number for us. We will see how successful it is, how the integration is working. After that, we will see maybe it could be a model for the future. Why not? It depends always on the markets, the market structure. It depends also if there is a right partner to do so. First, we will start that program and collaboration in Italy.
We do have a follow-up question from Mr. Assadollahzadeh regarding the time lag effect of our lease contracts into our books.
He said, "Okay, we had three strong years of growth and profits have declined. Looking at other financial service businesses, can you please commit to growing the business more effectively through automation instead of increasing the number of employees?"
Yeah, one main part of that is especially our digitalization program, meaning on the one hand, transforming all our IT services into the cloud. That is more the technical aspect of our digitalization program. The second part is really to make more or less manual work to really digitalize and make more automation on all the things around due diligence of our new customers because we are specialized in this segment of small-ticket leasing. It is really key to be as automated as possible to handle all the regulatory stuff that is needed for settling contracts.
That is the second large part of our digitalization program to really move forward to make operating income grow faster than operating costs at the end and to see bottom line growth as well.
We have a question in the chat from analyst Mingshan Sun from Deutsche Bank. She asked, "Could you please quantify the negative headwind from the tender offer for AT1 on the net interest income in Q4? And what is NII run rate or margin we should think about in 2025?"
The negative impact on the net interest income was not on AT1. That was done in the beginning of January this year. It was related to the last benchmark bond of last year, and that was a low single digit million number.
The next question is regarding the embedded value and how our business is being valued below this embedded value.
What do we do in the near term to increase investor confidence that the top line growth will result also in bottom line growth?
Yes, first, we are showing our numbers in a different way. I think it's pretty clear with a new PNs structure, with the charts we've shown today, with changing perspectives from time to time. To look into the embedded value, it's also very helpful because that's the substance we have today in our portfolio. It is there, and the embedded value is reflecting everything. It's reflecting the total lifetime risk costs. It's reflecting the total lifetime administration costs and also the outstanding total lifetime earnings of our leasing portfolio. With each new business leasing contract and with each percent growing, the embedded value will also grow.
To explain that and to make that more clear will be important for the future for us and the board and also with investor relations and also making clear the right levels. As I mentioned before, income, I think it's very clear with CM2, with volume growth. The interest rates are important there. From a cost perspective, it's decisive to reflect the right relation between costs and new business costs and leasing receivables, but also costs and running contracts, costs and running transactions on the other hand. From a risk perspective, as you mentioned before, to calculate from a long-term one with a 1.5%, it's fair as we saw and as we see looking backward. I think that is important to making that clear to achieving growth.
With that growth over the next couple of years, we will also see rising profit and rising return on equity.
We have a question regarding the new business leasing volumes year to date in light of the macroeconomic geopolitical changes. If you can comment on that already.
Yeah, I mean, we will publish our numbers in roughly three weeks. I think what we can say so far is that we are in plan for the first two months of this year. Margin is also okay on that. New business figures will be published in three weeks then.
We can say the current macroeconomic environment is not affecting directly our new business at the moment. The new business is running and we are, as Marty mentioned, on track and on plan.
From the, let's say, midterm run for that year, we have to see how the macroeconomic overall situation will move forward. For the time being, we are confident with our guidance, with our margin, not only with announcing the guidance, also with the figures we see today.
Coming from new business growth, the question from Tobias Lukasch from Kepler Cheuvreux is about our expectation for the amount of lease receivables at the year end of 2025.
Just a second.
We'll check that.
Yeah, we will expect above EUR 7 billion, so between EUR 7.2 billion-EUR 7.5 billion of lease receivables towards the end of 2025.
Mr. Lukasch also asked us to provide an equity ratio bridge for 2024 to 2025 as we expect it to be.
The expectation of our equity ratio will be around 16% for 2025.
I mean, part of that will be the earnings of last year, for example, or especially the retained earnings there. We will see some effects from the transactions we currently signed with Intesa on the equity then. That is more a technical aspect, a valuation perspective that will increase our equity to a smaller extent. However, there will then be deducted also the interest rates on our hybrids. We have just done the AT1 issuance with a coupon rate of 8.75%, so a little bit higher than the older AT1 instrument that will then be deducted from equity. I think as we are confident that we will also come to an end with the takeover of the franchise companies, this will then go directly into equity that will be also deducted because they are already consolidated. The purchase prices there will be deducted from equity.
We have two follow-up questions regarding developments and expectations regarding our P&L. One being for our NII margin, what our expected developments are going to be here, what's in net interest income margin expectation embedded into YACA items. Also, what is profit from disposal has seen some strong increase in 2024 and what are the reasons for this and is this trend sustainable for 2025?
Yeah, I start with the disposal and then you go for the NII. Yes, the disposal was a very good development from a P&L perspective. There we have also to take into account a bit of technical issue that our new leasing business some years ago came significantly down and now it is increasing again.
On the other hand, we see a good business after the regular lease term, the valuation and also the selling used object is going very good from a long-term run. We are always calculating there with a zero because we would like to meet our initially calculated residual values and that's from a long-term run fair to assume that in that year it was very positive. We think it will be slightly positive for the running year, but not in the same dimension as it was last year.
Yeah, and on the NII margin expected that will be a little bit higher compared to last year. As I mentioned, we had in last year maybe some effects, some one-off effects on the interest expense side, as I just mentioned on the tender offering of last year that a little bit weighed on interest expenses.
On the other hand, we have seen strong increase of interest expenses due to the interest rates that are not coming down as fast as we expected to some extent. This will be taken into account for the next year and we expect less growth on the interest expense side. However, growth on the interest income side given the strong leasing portfolio of 2024 with a margin of 17%. NIM is expected to increase a little bit.
We received the last question from the chat on our webcast regarding the factoring business and how the selling of this is going.
Yeah, we are in hopefully final talks within the sale of the factoring business. However, we have not yet signed an SPA or so, so there can always happen things in the last minutes of such a transaction.
I would say that the probability of having a successful sale here is more likely than not. However, that is still then the case when the ink is wet under the contracts and that has not been so far.
We have two more questions coming from the set. One being, what sense does the embedded value make as at December 31st, 2020, it was EUR 1.6 billion including equity, now it is EUR 1.7 billion, which corresponds to an increase of only EUR 62 million after four years. The usual lease term, how should this be assessed?
Yes, but that term is in decrease in new business because of the pandemic in 2022, 2021. In 2021, the new business was down with EUR 1.6 billion new business and now we are on a EUR 3 billion level.
In 2019, it was EUR 2.8 billion and that is exactly what you can see also in the embedded value calculation. On the other hand, we did all the years profit paid a dividend. That is for the shareholders as part of, let's say, embedded value we are paying to the shareholders each year. The most important impact there is the down and the dip phase in new business development.
There is a second question regarding the embedded value and why we not show it without minority interest so that the embedded value per share for shareholders could be derived.
The embedded value is shown as an overall portfolio perspective. That's right. We show on the one hand the embedded value before equity, so without equity. Then we show also as embedded value within the equity.
Of course, we can add a third one or you can calculate also by yourself when you take the embedded value before equity. You have to take care it's also before taxes. That is, so to say, the economic value of the leasing portfolio without any equity. Then you can adjust the equity and then you can take for minorities or something like that, which is important.
Y eah, and if I may add just to that, what Sebastian just mentioned, the embedded value of without equity and before taxes has grown by roughly 16%. The pure economic value has grown much more than including the equity position.
Speaking of equity, this brings us to our last question regarding equity issuances in 2025 by asking, given the significant undervaluation of the stock, would it make sense to grow slower and not issue any equity at these prices?
Just what our plans regarding equity are.
For 2025, we do not plan for any equity issuance. We have always the possibility to strengthen our equity, for example, with instruments such as an AT1, which we recently did at the beginning of 2025. If there would be really a necessity for that, that could be an idea to tap AT1 or so, but pure equity issuance is not planned for 2025.
That growth level is on a level where we are covered with our current equity situation. That is not the plan with that growth pace and that growth level to issue new equity because absolutely right for the time being, it is important to having a good growth level to having a good profitability in new business to strengthen P&L on the other hand.
The issuing of new equity, it's more or less a question of the future.
Yes, thank you, Sebastian. Martin, thank you, ladies and gentlemen, for joining us today. Questions may spring to your mind at a later stage. Please do not hesitate to get in touch at investor@grenke.de. On the 3rd of April, as Martin just mentioned earlier, we are going to release our new business figures for Q1 2025. Stay tuned. It was our pleasure to have you. Take care. Have a nice day. The conference is now concluded. You can disconnect. Goodbye.
Bye.
Thank you.