Welcome, ladies and gentlemen, and thank you for joining our Q1 2025 Earnings Call. My name is Franziska Randt, I'm Head of the IR department, and I have the pleasure to say that today here with me is our CFO, Dr. Martin Paal. Martin, welcome. We will start with the presentation, and right after, we will enter into our Q&A session. Before we begin, I would like to inform you of a structural change to the format of our earnings calls. For Q1 and Q3, starting this quarter, the prepared remarks and the presentation will be delivered solely by our CFO, Dr. Martin Paal. This change reflects our intention to emphasize the financial performance and aims to ensure a more data-driven presentation for our quarterly results. With that, I will now hand over the call to our CFO. Martin, please go ahead.
Yeah, thank you, Franziska. Ladies and gentlemen, a very warm welcome to our earnings presentation for the Q1 of 2025. As you are aware, we published preliminary figures for Q1 already on the 29th of April. Today, we have confirmed these figures, and I'll additionally provide you with some more details on our performance in the first three months of 2024. We got off to a good start in the first three months, growing our leasing new business volume by 10.5% to EUR 740 million compared to the previous first quarter. Not only our top-line growth was worth mentioning, we also contracted this new business with a strong CM2 margin of 17.6%, well above our guided target of above 16.5%. Turning to our key P&L figures, we see that our cost-income ratio stood at 56.8% in Q1 2025 compared to 58.1% in the previous year's first quarter.
This development reflects two important aspects. Firstly, the strong new business growth of the past years built up a strong inflow in interest income today. Secondly, our focus on cost efficiency is starting to show, as reflected in the slower pace of our cost development. However, regarding our credit quality, we saw our loss rate come in at nearly 1.9%, and this is higher than last year, but as expected. For the entire financial year 2025, we continue to expect a loss rate of around 1.6%. Our group earnings amounted to EUR 10.2 million. This result has been seen in light of the continuously elevated expenses for settlement of claims and risk provision.
This was anticipated, as stated with the publication of our full year 2024 results in March this year, as we expect group earnings in the first half of 2025 to be lower than the corresponding half year in 2024. Lastly, our equity ratio remained stable at 16%, underlying the strength of our capital structure. Not least, thanks to the reissuance of our AT1 bond in January this year. Let us now take a closer look at leasing new business development in the first quarter. We continue to see solid momentum with double-digit growth in volume, despite the high basis of previous years and current macroeconomic uncertainties. I would especially like to draw your attention to the line that represents our CM2 margin development over the past two years. Here we see a very steady and positive development across the past quarters.
With currently 17.6% for the first quarter, we are well above our CM2 margin target of above 16.5%. Due to the elevated number of insolvencies and defaults towards the end of last year, we have refined our risk models accordingly and raised our expected credit loss calculation, which is a deduction item within our CM2 margin. We are therefore all the more satisfied with this development of our CM2 margin. Now, I'd like to turn to our income statement. In the first quarter, we saw a strong development in operating income, which increased by 16.6% year on year, outpacing cost growth of 14%. This positive operating leverage reflected both continued top-line momentum and our ongoing efforts towards a disciplined cost management. As a result, the operating result before settlement and claims and risk provisions improved significantly, up by EUR 11.3 million or 20.3% compared to the previous first quarter.
This positive development is also reflected in a reduction of our cost-income ratio from 58.1% to 56.8%. As anticipated, settlement of claims and risk provisions remained in line with the trend we already observed in Q3 and Q4 of last year. This is primarily due to a persistently higher level of defaults, often resulting from insolvencies. That said, we currently expect this position to remain at a high level in Q2, assuming no change in the macro environment. Nonetheless, based on current trends, we look with confidence towards the remaining financial year and expect earnings in line with our guidance. Overall, for this quarter, we reached an operating income of EUR 14 million and group earnings after taxes of EUR 10.2 million, mostly under the impression of higher settlement of claims and risk provisions.
A technicality which I would like to mention in regards to our earnings is the fact that we always pay our AT1 bond interest in the first quarter, with a corresponding effect on our earnings per share. This is, however, a temporary effect which will level out across the year. Now, I'd like to shed some more light on our encouraging operating result before settlement of claims and risk provisions. This slide illustrates perfectly that the profitable growth of the past years and our focus on cost efficiency is gradually showing as a positive momentum in our operating result before settlement of claims and risk provision. The latter is impacted by volume effects, given that an increasing portfolio, as well as higher defaults, require more risk provisioning. We remain confident that the growth in operating income will outweigh this development, leading to an increase in our group earnings.
This effect is illustrated in the shaded area. Additionally, we steer our risk carefully, firstly with a more adequate ECL calculation in our CM2 margin and secondly with increased efforts in debt collection in case a contract defaults. Let us now move on to our cash flow statement. Operating cash flow reflects the impact of our continued business growth, driven in part by investments in lease receivables of nearly EUR 765 million. At the same time, we saw a positive contribution with an increase by almost 10% from higher customer payments of nearly EUR 684 million, in line with the underlying lease portfolio expansion. Additionally, we repaid refinancing instruments totaling roughly EUR 682 million while securing additional refinancing of some EUR 523 million to support further growth.
Cash and cash equivalents as of end of Q1 2025 came in at EUR 951 million, which leaves us on a solid position to finance our future new business. With regards to our three pillars of refinancing, these remain pivotal on our growth path, with 38% in senior unsecured, 30% in Grenke Bank through our deposit business, and 15% in our ABCP programs. In addition to this, equity remains a key element of our capital base. In this context, the successful completion of the tender of formerly three outstanding AT1 bonds and the issuance of one new EUR 200 million AT1 instrument at the beginning of January were important steps in this first quarter. We continue to actively manage our funding mix in line with business growth and regulatory requirements. Let me conclude by reiterating our outlook for 2025.
We had a solid start to the year in terms of leasing new business with strong volumes and margins in the first quarter. Therefore, we continue to anticipate leasing new business to come in between EUR 3.2 billion and EUR 3.4 billion, with an expected CM2 margin of above 16.5%. In order to achieve our ambitions, we continue on our profitable growth trajectory and build on our solid funding structure. On the earnings level, settlement of claims and risk provision and our improved cost-income ratio of below 60% also come in as anticipated. Consequently, our outlook for group earnings remains unchanged at EUR 71 to EUR 81 million, with an underlying loss rate of roughly 1.6%. As I said earlier, we look with confidence at the remaining financial year and our guided earnings target.
Ladies and gentlemen, with that, I would like to say thank you for your attention, and I'm now looking forward to your questions.
Thank you very much, Martin, for your presentation. We will now enter into our Q&A session, ladies and gentlemen. You have the option to ask an oral or written question depending through which link you joined this earnings call. If you joined through our verbal or oral line, you see a hand button at the top of the screen, and there you can raise it to ask a question. If you want to use the chat function, you're also more than welcome. I see already that we have a question coming from the audio line from Otto. Mr. Pfänder, you are now being unmuted. Please do not forget to unmute your device as well.
Yes, good morning. Thanks for taking my questions. First of all, I would like to come back to your cost of risk trajectory. You reported around 1.9% loss rate in the first quarter. I think you mentioned the Q2 might be comparable to this. Your guided loss rate is 1.6% for the full year. That would mean for the second half of the year, loss rates which would be below the long-term average. How do you square this with the macro situation out there? That is the first question. If I am looking at the interest rate expenses in the first quarter, they were EUR 60 million. I think in the fourth quarter, they were EUR 66 million. I was a little bit surprised that this is coming down. Could you maybe explain the effect, what happened there?
Maybe last question, CM2 margin, what loss rate did you factor in, for example, in the Q1 to calculate this margin? Thank you.
Yeah, thanks, Mr. Pfänder, for your questions. Just in the order of how you asked them, I'll start with the cost of risk. First of all, all our calculations, all our forecasts on risk provisions for the year are based on our data, historical data, current data, which is pretty accurate. That is in general the basis for our forecasts. Second, there might be a calculation topic if you now compare this 1.9% loss rate for the Q1 with the guidance of 1.6%, because as always, we have the numerator and the denominator in the equation. The loss rate at the end of the year will be based on the denominator, so on the lease volume at the end of this year. Currently, we have a lease volume of EUR 10.2 billion. Given our growth throughout the year, this will increase.
Only by that, this loss rate, even if risk provisions would remain stable only, even with this, the loss rate would come down by a lot of basis points from 1.9% towards 1.6%. Third, I mean, we have a lot of things done, not only since the end of last year already before, but especially beginning in the Q3 and Q4 of last year in terms of dunning processes, collection processes of the business that have been on our books when contracts run into default. We are in so far also selectively, very selectively, I would say, on our new business, not ruling out, for example, completely any object categories or something like that, not to jeopardize our new business growth. The combination of that makes us confident on our loss rate.
Yeah, thirdly, if no further tolls from the current macroeconomic environment will happen, then we are confident with this loss rate towards the end of the year of 1.6%. Second question was on interest expenses. Yes, that's right. We had in the Q4 some one-off effects that would have to be deducted if you make the comparison from Q4 2024 to the first one of 2025. However, what we also see, we do not expect interest income in absolute terms to come down over the year, but really to have smaller increases in interest expense, sorry, not interest income, in interest expenses, because we have now the price effect, the price effect of interest expenses, namely interest rates, is slowing down because interest rates have gone down and most of our more expensive refinancing is now on our books.
Therefore, we see more or less volume effects in terms of interest expense and will expect this to increase over the year, but at a slower pace. Your last question on the CM2 margin, we have factored in a loss rate of around 1.6% in our new business going forward.
Thank you, Martin. We have a next question coming from the audio line from Mrs. Sun, and you are now being unmuted.
Hey, thank you very much for taking my question. Two questions from my side. The first one is regarding the payment behavior from the customer. I just want to ask, can you provide any information or any colors on how has the customer payment behavior changed in the recent months? Have you observed any improvement in terms of reduction in insolvency level or mispayment behavior? The second question is related to the recent volatile interest rate environment. We have been experiencing some changes or shift in the year curve in the past months. Has your pricing strategy changed in the volatile market? Would this have any impact on your CM2 margin for the new business? This is also related to my last question on the net interest income. Net interest income has been quite encouraging in Q1.
Shall we expect the current margin as a normal run rate for the remainder of the year? Basically, the margin stays the same and the net interest income should grow as the volume grows. Thank you.
Yeah, thanks for the question, Mrs. Sun. Coming back to your first question on the payment behavior, what we currently observe in the Q1 at the beginning of the Q2 and also since mid of last year is stable at a high level, I might say. We do not see any, I would say, any bigger enhancement in the payment behavior of our clients. The number of insolvencies is still high, number of defaults is still high. More or less that is what we expected since the second half of last year. Your second question on the interest rate environment is that we have been seeing, especially if we look at our own credit spreads on the debt funding side, some fluctuations, especially after the beginning of April, after the tariffs discussion started there.
We do not change our general funding strategy, relying on our three debt pillars, especially senior unsecured. We planned this year with two issues. The next one will become probably shortly. The second one then will be planned for the second half of this year. This is combined also with the solid funding from Grenke Bank and our ABCP programs. In terms of CM2 margin, this has a positive effect if interest rates are going down. That is also part of what we have seen in our CM2 margin at the end of last year and at the beginning of this year, because we have the CM2 margins of well above 17%.
This will level out throughout the year, not only because the interest rates that enter our CM2 margin will become more stable, but also because on the other side, the conditions that we offer our clients and that our competitor offers to our clients, markets are very transparent in that regard, will with decreasing interest rates also come down a little bit. We do not expect such a high CM2 margin for the rest of the year. Your third question on net interest income, yes, that's right. It came in pretty good in Q1. However, this is also, yeah, as expected, because we now really see the results of our very good new business in terms of volume and in terms of margins that now enter our P&L. Now this growth accelerated in terms of net interest income.
We have seen higher NII growth or higher operating income growth as opposed to growth on the operating cost side. That makes us confident for the rest of the year.
Thank you. We have another question coming from Mr. Thomann from HSBC. Your line is now unmuted. Please also unmute your device. Mr. Thomann, please go ahead.
Good morning, everybody. Some questions, follow-up questions from my side. First of all, on your interest expenses, which dropped significantly in the first quarter, is this just a function of lower ECB rates, partly on your core money initiatives and so on, or what has been driving this decline? Secondly, on your loan loss guidance, in March, you still talked about 1.5%. Now you talk about 1.6% for the full year. When has this view changed? Next thing is on the profit from disposals. Does it include any extraordinary effects? Why is it so much higher this quarter? Last but not least, your capital ratio is now at 16%, so previously the minimum ratio. Do you need to issue new AT1, or what is your plan to boost this capital ratio or keep it at least stable?
Because if you grow your balance sheet, it would go up over the next quarters. The balance sheet would go up and the ratio would continue to go down.
Yeah, thanks. Thanks, Mr. Thomann. The first one on interest expenses, they dropped in comparison to last year's last quarter, so to Q4 2024, mainly driven by one-offs that we saw in the last quarter. As I said, we do not expect this position to really decrease over the course of the year. It will still and consistently increase over the year. It is always a function of our funding mix, so of the deposit business of Grenke Bank, of our senior unsecured instruments, and of the ABCP programs. We do not expect this to really, on a nominal basis, decrease over the year. It will increase only by growth that we will see on the liability side with our funding. The second one on our loss guidance, we guided for this year always, and also in March, I think we said between 1.5% and 1.6%.
It is not always easy to really guide it with the exact percentage number. This loss rate guidance of 1.6% is what we planned for at the beginning of this year. There has basically nothing changed in the last months there. Your third one on the disposals, yes, that is pretty high in comparison to former quarters. This has two effects. The first one is a more technical effect because we had seen or we had done in the corona years less new business that was intentionally done because we were really restrictive in our underwriting policies there. Those portfolios are now running out. They will leave our balance sheet. On the second hand, yes, that is right, we see some increases in prices in the objects. Maybe that is due still to inflation over the last couple of years that we have seen.
That is nothing persistent that would persist over the whole year. Normally, in our forecasts, we see more or less a zero in that position. For that year, we expect some positive effects, but we will not expect this EUR 4 million for each quarter over the whole year. Your last one on the equity ratio, yes, 16%. We feel comfortable with that one. Even below 16% would not make any issues for us. That is the balance sheet capital ratio that also corresponds to regulatory requirements from BaFin, regulatory assumptions or requirements, if you wish, from our rating agencies. These are also pretty comfortable with our equity situation and equity ratio situation to secure our BBB funding on the investment grade side. We feel comfortable with that. Even a little bit below 16% would not be an issue at all for us.
Thank you, Martin. You answered also already a lot of questions coming from the chat with regards to equity ratio, loan losses. We have another follow-up question from the chat. I will read it out loud. As I understand, slide six, you want to outgrow the rising risk costs. However, you grow at an enormous level in recessionary countries such as Germany, Austria, and Switzerland. And you underestimated the loss rate in the second half 2024 and the loss rate of 1.9% we saw in the Q1 or also in COVID. What is your confidence based on that you do not grow with a negative selection of your borrowers and that the gap between the net earnings settlement of claims and risk provision?
Yeah, I mean, the growth that we see here on this illustrative slide six on the operating result is what we have in our books. Though what is already on our balance sheet is the basis for really our P&L, especially on the interest income side, on all profit, on all operating income for the year of 2025 and also the years beyond. Our loss rate calculation of 1.6% is based on the data we have. We have very good historical data, accurate data, and that's our forecast that we remain confident to reach until the end of the year.
I wouldn't look too much at this number 1.9% because it's really driven by this numerator and denominator effects of this equation because we are now comparing a risk provision that we have seen in Q1, just technically multiplying it with four and then comparing it as a full year outturn and then comparing it to our lease volume only on Q1 and not on the projection of the full year. As I said, then only by that, the loss rate would be significantly lower than 1.9%.
Now moving on to a question that is more with regards to sales channels. There, Mr. Asadolatz asks, could you please provide an update on the penetration of leasing business in digital channels where you plan to make leasing as easy as online shopping? How much of the business does it represent today and what are your plans for the next three years?
Yeah, so in terms of digital channels to make leasing as easy as online shopping, we already have a cooperation. We have a stake, 26%, in Miet24, a German company with which we already are in the works of integrating, we call it a renting button into the web shops of our dealers in Germany. We also have these cooperations in other countries, especially for example in Italy. We are rolling that out currently to Spain and to other countries in Europe, sorry. However, the nominal portion of that is, for example, in a country as Italy where we have this cooperation for longer, is a non-negligible part. However, in terms of our whole leasing business from that digitalization channel, still comes only a one-digit number of percentage in terms of new leasing business from the digitalization side.
Now we stay with everything that's digital. Could you provide an update on the progress of our move to the cloud? Can you also provide an update on annual cost savings that we expect through this migration?
Yeah, with our digitalization program, we are on track and especially we are in budget. Yeah, we said that we try to spend or that we aim to spend around up to EUR 15 million in terms of P&L figures over three years. If we see the Q1 figures, we are very good in our budget. We are making good progress in terms of digitalization. We have already transferred some applications into cloud technologies. We already have done more automatic processes in everything that has to do with our customer acquisition and in terms of our regulatory requirements and approvals needed that we want to digitalize more, that we do not lose time there. Yeah, we are moving forward there.
We have another question coming from our audio line from Mr. Pfänder. Your line is now unmuted, Mr. Pfänder. Please go ahead.
Yes, just a quick follow-up, please. Could you comment on your underwriting behavior? I remember that during COVID, Grenke was a little bit more careful on taking on new business, I guess looking more in the margin. I mean, right now we have a, let's say, challenging macro outlook or situation out there. Is it in any way factored in how you approach your underwriting? I think your new business targets are still the same. What loss rate do you, for example, price in the new business? I would assume it's above 1.6%. How do you go for new business? How do you price it? How aggressive or conservative are you? That's my question. Thank you.
Yeah, it is a different situation compared to the post-COVID time, honestly, because at that time there was also a liquidity crisis where it was not sure how much liquidity we would have on our books to really do new business. We were very restrictive in that regard directly after or within the corona pandemic in terms of new business of 2020 and 2021. Liquidity is not an issue currently. Yeah, however, we see macroeconomic turmoils, as you said, but not comparable to what we have seen in COVID. That is why we are not that restrictive in our underwriting policies. We are not ruling out general object categories, for example, not ruling out in general industries.
We are really selective in our countries with our sales guys out there on a, I would say, even on a single customer basis, single contract basis, whether we do it or not to not jeopardize our guidance because we leave our growth trajectory, our growth path on EUR 3.2 to EUR 3.4 billion expected new business for that year. In our current CM2 margin, we have already factored in this loss rate of around 1.6%. That is included there.
Thank you. We have two questions from the chat regarding our profit and loss statement. There the person asks what the net interest income expectation for the full year is and that the operating cost appeared to be slightly elevated in Q1. If there is anything out of the ordinary here to be noted.
Yeah, on the interest expense side or interest income overall, we see our good new business with good margins over the last year now coming into our P&L. We definitely expect in interest income significant increases over the course of the year at rates that might be comparable to what we have now seen in the first quarter. On the cost side, there is nothing extraordinary in what would make costs decreasing over the year. The contrary is true that we expect also on the cost side increases. That has also to do with our sales ambitions. On the other hand, what could be seen as extraordinary in Q1 were minor numbers in terms of, for example, advisory fees that are in relation with our most recent transactions, such as the sale of the factoring and the cooperation of our cooperation in Italy with Intesa Sanpaolo.
Okay, we have one last question coming from the chat. The person asks, why is the equity price down for such a long time? I think the return on equity is meant here. When do we think that there will be growth in the ROE?
Yeah, the equity price has come down, especially over the last months or since October, November last year. From my opinion, I would say due to the earnings warning we had there, we expect our share price to increase given that we deliver what we forecast. Yeah, that's important that we stick to our guidance and that at the end we deliver our guidance, which from our point of view would have a positive impact on the share price. On the other hand, share prices are always done by market participants. Not saying too much on that, or not commenting too much on that. Another very important topic when it comes to share price and valuation is our embedded value, yeah, where we really calculate just, I would say, the value of our portfolio that is on our books, assuming no new business.
This embedded value, even if you take out everything that does not relate to ordinary shareholders, such as equity from AT1 holders and the relating interest there, even if you take out that and just focus on the current status of the portfolio, assuming no new business would make up an embedded value of EUR 1.5 billion, and that would relate to share price that would be at least double as it is currently. Just to give you a relation on how we have a view on share prices and how we consider the valuation on capital markets from our side.
Thank you, Martin. So far, there are no further questions neither from the chat or the audio line. Thank you very much, ladies and gentlemen, for tuning in today. We will publish our Q2 new business release on the 3rd July. If you have further questions, please do not hesitate to get in touch through investor@grenke.de or by phone. We're always happy to talk to you. The conference is now concluded. Have a great day, take care, and goodbye.