Ladies and gentlemen, welcome to our full year results conference here in Frankfurt. Welcome also to those of you joining us on our webcast. Thanks for your time. Thanks for coming. We are really pleased to have you here, and given that markets are really turbulent, this means even more to us. Thank you. My name is Anke Linnartz, I'm Head of IR at GRENKE, and I'm here today with Dr. Sebastian Hirsch, our CEO and interim CFO. As always, we will start with the presentation and we'll have time for Q&A right afterwards. Let's get started. Dr. Hirsch, the floor is yours.
Thank you, Anke. Warm welcome also from my side, especially here in Frankfurt, but also in the webcast. We appreciate that you take the time to join us today. Many of you know that I've been with GRENKE for quite some time, and if I remember correctly, recently, it was about 18 years ago when I started my first job at GRENKE. Now, almost two decades later, I'm very pleased that the supervisory board has placed its trust in me and appointed me as CEO. In my new role, I will continue to work hard and with all my strength to further fuel GRENKE's success story. I would like to thank our former CEO, Michael Bücker, for the time we spent together leading the company. Almost always, we shared the same opinion, just when it comes to soccer, we rooted for different teams.
May, as some of you know, I am a passionate soccer player, which is why I firmly believe in the power of teams. Together with my colleagues, Isabel Rösler and Gilles Christ and the entire GRENKE team, we will expand our position as a leading provider in small ticket leasing globally. Where do we stand today? We got a lot of stuff done, and I will present you some of our operational highlights of 2022. Leasing is on rise, and more than this, the range of objects available for leasing is continuously expanding in line with mega trends. Just imagine the potential contribution to our portfolio growth through climate friendly lease objects such as wall boxes and photovoltaic systems. We left the franchise model behind and are now pursuing growth in leasing markets through our own subsidiaries.
As of today, we had acquired eight franchise companies and intend to acquire the remaining companies by mid of 2023. Last year, GRENKE was rated by Fitch for the first time. We received that investment grade rating of BBB with a stable outlook. I'm pleased that another renowned, well-known rating agency has awarded us an investment grade rating and has recognized the strength of our business model. As long as the rating of Standard & Poor's with BBB+ is stable since years. In response to the short seller attack, GRENKE dedicated more than 18 months towards resolving the issues and rebuilding trust. Also, last year, we made further advancements in the areas of anti-money laundering, compliance and internal audit. I'm very happy to say our efforts were recognized and awarded the third place by the DVFA Corporate Governance rating for SDAX companies.
Let's now move on to review our guidance of the last year. We mastered the past financial year successfully and achieved our targets for the financial year. First, we generated new leasing business of EUR 2.3 billion and group earnings of EUR 84.2 million, so reaching the upper end of our guidance range for both. Our equity ratio remains higher than our self-imposed target level, while our cost income ratio is close to our updated guidance. With recording a loss rate of 1.3% in 2022, we outperformed the guidance range of 1.4%-1.7%. Contribution margin, too, is quite important and will remain our central management tool. In 2022, it came in at 16.1% compared to our midterm target of 17%.
To sum it up, we delivered on our targets and have a strong base to build upon. Please move with me to slide six. The dark line here divides the bars into current portfolio below and new business above the line. The bars below the line represent what we already recorded. It's locked in. The bars above the line represents the expected growth of our portfolio for the next years and the basis for our future earning expressed as CM2. EUR 3.2 billion is what we expect to generate from our new business over the next five years. Given that this number was EUR 2.7 billion 1 year ago, it clearly shows how rapidly our portfolio is growing.
In my opinion, a really strong development. Where does it growth come from? Ladies and gentlemen, we ranked third in our core market, Germany, France and Italy, in terms of market shares. Market shares of the total leasing market. With approximately 10% market share, we are amongst the strongest players, and the global addressable market volume is huge. In North America and Australia, as our future core markets account for more than 30 million small medium enterprises. While our established core market in Europe count 25 million small medium enterprises. Just take in account that in Europe, every second SME uses leasing to finance its business. Today we are talking about 660,000 customers in our portfolio. Means 660,000 customers with a running contract at GRENKE. There is also a huge potential.
Just imagine the growth if only each six of our existing small medium enterprise customer would lease another object. This would lead to more than 100,000 new contracts with an average of EUR 9,000. This ultimately means EUR 1 billion in new leasing business. As you can see, our new business is on rise. Let me share with you already today a sneak peek into our Q1 new business figures of 2023. We see a strong development in profitability as indicated earlier. CM2 of new business is rising and we expect a CM2 margin in Q1 2023 to outperform full year 2022 CM of 16.2%. We are on the right track, ladies and gentlemen. We will further increase our level of digitalization as it's crucial for our growth. The main purpose of our program is cost reduction.
Cost reduction in the operational management of our business. This is the base for scaling the business going forward. The success of our small-scale business model from the potential lessee's initial application to the disposal of the leased asset at the end, can only fully unfold through highly automated digital and intelligent processes. This is a way to deliver more value to our customers while scaling our business to an even greater extent. It's therefore crucial for us to deploy the best possible process technology along our entire value chain. To ensure digital excellence across all our processes, we will invest EUR 45 million-EUR 50 million in our digital infrastructure over the next three years. Only with this investment, we will be able to structurally and sustainably achieve profit growth that exceeds our new business growth.
You see here on the bars in 2025, we will achieve break-even for that program. In 2027, we will have earned back our investments. We will predominantly spend money on digital integration. We will invest in digital integration and enhance our data handling through cloud technology. By the end of 2024, we will be benefit from a modern IT architecture based on the transformation to cloud. Previously planned investments in hardware for technical infrastructure across the globe are thereby finally not necessary any longer. By end of 2025, we will have completed all investments in full automation and digitalization of processing along the entire value chain. Plug and lease will become reality. The leasing request in terms of a customer journey will be a non-event. Noiseless, smooth, simply lease and use.
Over the last couple of years I've been often asked, "Sebastian, what is the best way to evaluate GRENKE's performance?" My answer, always the same, you know, CM2 and cost income ratio. Today we would like to give you a better understanding of how we look at our business. For that purpose, we have prepared a framework for you that includes three main KPIs: CM2 margin, cost income ratio, and equity ratio. All of these KPIs are directly linked to our return on equity. The KPI you use. The challenge is that our business is based on a portfolio of leasing contracts with an average lease term of about four years. Therefore, moving on KPI in the direction of the respective target level lead to an increase of return on equity at the end of the day.
Later on, I would like to show you how this framework and the underlying KPIs will help you to effectively look at our guidance. What we have made available for you is here scenario calculation and some sensitivities, but we will come back later to this. Let's first, however, take a closer look to our performance in the financial year 2022. In 2022, we saw strong effects of our acceleration in new business. Our leasing new business grew substantially every quarter. In total, we increased leasing new business by over 38% to a total of EUR 2.3 billion, hitting the top end of our improved guidance. At the same time, we experienced a sharp rise in interest rates throughout the past six quarters, especially in the area of two to four years duration.
Here we saw an increase of over 370 basis points since Q4, 2021. That's the blue line on that chart. As you know, the interest rate development has a direct impact on our CM2 margin. While we saw a decline in our CM2 margin in the same period, the good news is that we are able to maintain it at a robust level. Throughout the entire year, we were able to adjust our leasing contract conditions continuously passing on the rising interest rates to our customers, but always with a time lag impact of about one quarter. We expect to continue passing on the higher interest rates in our new business contracts while maintaining our strong growth path in new business.
With regards to our P&L shown here in that chart, of the financial year 2022, our new business volume led to a net interest income of about EUR 345 million, which is a slight decline compared to the previous year due to the smaller portfolio, 2020 and 2021. Profit of new and service business increased by 5.7%. Our costs increased by 17.6% and the key factor there, higher expenses for staff as we changed our remuneration model, our total reward system to reduce variable pay and took measures to support our employees in dealing with ongoing high inflation. Overall, this results in a cost income ratio of 55.2% for 2022.
This relative increase is, however, temporary, reflecting the adjustments in our cost structure as well as the income contribution of our overall leasing portfolio and is expected to normalize in the long run. Settlement of claims and risk provisioning in the loss rate, very stable, 1.3%, and the overall risk provisioning on the P&L perspective is down by 16% to EUR 120 million. In 2022, we achieved an operational result of EUR 98 million, and the decline compared to the previous year is mainly based on the one-off effect, may you remember, of the sale of our shares in viaf intech last year. Oh, it was 2021, of around EUR 23 million impact in 2021. Higher staff costs, as I mentioned, and increased expenditure for currency translation differences.
Our other financial results of EUR 30 million were mainly based on improved market valuation of derivative financing instruments for interest rate hedges, which we expect to neutralize over the lifetime we talked about per EUR 9 million also. In all, we reached earning before taxes of EUR 111 million, with a net profit of EUR 84.2 million, and we reached our upper end of the guidance. This corresponds to EUR 1.75 earnings per share. As one of the cornerstones of our business, I would like to also provide you with an update on our funding mix shown on that slide. Senior unsecured continued to contribute slightly more than half of our overall non-equity funding volume. Deposit at GRENKE Bank, quite important, continued to be the second important pillar by 20% to our funding.
Also asset-backed securities and instruments are stable and account for around 18% of our funding. Quite important for each of the funding boxes for the whole funding and all is that we are avoiding maturity transformation, so our funding is matched to our assets, to our leasing receivables at the end of the day. Ladies and gentlemen, after having presented our strong financial results of 2022, let's shift gears. I want to provide you to know and to invite you what are the underlying economics of our leasing business and how we measure our performance. We call it GRENKE Performance System, GPS. This will help to understand why we guide CM2 margin, why equity ratio is important, and cost income ratio.
These three factors play a crucial role if you want to analyze our company potential performance for the future, or as some of you measure it, for a return on equity. I will now explain in more detail how you can derive an approximate return on equity from our reported figures and how changes in one of these factors might affect the return on equity. Important is the following slides are to illustrate or our thoughts, and we are also steering internally with that slide. They do not reflect our actual return on equity because it's a model and only shows the possible return on equity for one year portfolio set in total based on roughly four years, and it's based on our leasing business.
Nonetheless, we will work with 2022 financial ratios to ensure that you can get to know the principles and assumptions which form the baseline of our calculation. Let's jump in of it. At first, to get a better understanding, all the figures we will see now, all the bars are based on an NAV of 100. That's our base unit to talk about a net acquisition value of a portfolio of a single leasing contract, doesn't matter, of 100. We start here to creating our return and earnings before taxes, with our CM2 16.1 based on 100 because of the 16.1% CM2 margin in 2022. As I mentioned before, cost income ratio is important for us. We would like to deal with cost income ratio in that model too.
That means we have to adjust our CM2 by the risk because the income in the cost-income ratio is before risk. To multiply our income with cost-income ratio together the cost, we adjusting CM2 with 5.5 expected credit loss. It's the base of the last year new business portfolio, that brings us to a CM2 before risk. That's the base for our cost calculation here with the cost-income ratio in that scenario of 2022, 55.2%. Brings us to EUR 11.9 costs. We have to reduce also the expected credit loss, means the risk at the end of the day. From CM2 before risk minus cost and risk, we are on an earning before tax level. MA, if you know, that level is based on whole lifetime calculation.
Our CM2 is always based on an average four years of leasing portfolio, also the 4.2 earning before taxes on a full lifetime of leasing portfolio of a leasing contract. To bring that in the right line for return on equity, we need our duration, and the duration is roughly 2.5 years for a new business portfolio. May you ask why 2.5 years and not two when we're talking about roughly four years average lease term, initial lease term. You have to take in account that we have a residual value at the end and some leasing contracts are running an extension. The effective duration in our leasing portfolio is not two years, it's 2.5 years.
Quite important to getting that bridge to switch from a total earning before tax to an earning before tax per year. That's our average during the lifetime of a leasing contract. Means for EUR 100 net acquisition values, 16.1% CM2. The assumption is that the cost-income ratio over the lifetime will be stable with 55.2%. That will bring us each year in average EUR 1.67 earning before tax. The second part of a return on equity is equity. The question now, what is the portion of equity which is required for making that leasing contract or that leasing portfolio always based on the EUR 100? Starting point here is the EUR 100, our net acquisition value.
We have to add our initial direct cost, that's the incremental cost and the EUR 103 here called as net investment. That is a net investment under IFRS. It's our starting point for the leasing receivable. That is the amortization block over the lifetime, including the residual value, and that's quite important here. To go forward in an annual basis, we have EUR 103 net investment and in that EUR 103 net investment is EUR 9 residual value and EUR 94, that is the amortization part of the leasing installments. To bridge that now into a yearly view, we have to take care of what is the real tied asset at the end of the day during the whole lifetime of a portfolio of a leasing contract.
You can divide the 94 by two and the nine is constantly tied asset during the whole lifetime. That brings us to our leasing receivables an average over the lifetime of 56. That's the average leasing receivables over the lifetime. We would like to deal with our equity ratio on the balance sheet. We need an adjustment from leasing receivable to balance sheet. The leasing receivable is the dominator in our balance sheet, and we can add 25%. It's quite stable over the years because of cash, because of some intangible assets, because of some infrastructure and so on. Means for 56 average leasing receivables, we will see roughly 70 balance sheet because of the multiplier 1.25.
That brings us to an average balance sheet over the lifetime of the EUR 100 initial NAV of EUR 70. Now we are ready to deal with the equity ratio, and we took also the equity ratio per end of last year was 20.8%. That means for EUR 100 new business within stable equity ratio of 20.8%. Under that assumptions, that means it is like a tied equity in average of 14.6%. That both together the return, the earning before tax and the equity that results in the return on equity before tax of 11.4%. Quite important is to see here CM2, on the one hand, cost income ratio on the other hand and equity.
That are very important parameters to go in conversation with you and also going in conversation with our managing directors, with our sales guys to say, "Hey, why is 17% CM2 margin a good level? Why is that a good target?" With that model we can explain internally why it is a good target, and we can also explain externally why it is a good target. It's like a bridge. It's like a translation between internal view and external view. The huge power I see in that model is that we can covering our internal view on our CM2 because it's quite important and successful, and we will find the right translation to talk to you, to the capital market in terms of return on equity.
On the next slide, we switch a bit the parameters because the question is then, "Hey, 11.4%, that's based on the new business, 2022. Looking in the balance sheet, the return on equity before tax is between 8% and 9%, what does it mean for the future? Looking into the future with that model." There we switched separately each parameter, first CM2 margin. As I mentioned before, we would like to go forward with the CM2 margin closer to 17%, and it looked very good at the moment in the first quarter 2023. The shift of 100 basis points in CM2 margin means also a shift of 100 basis points in return on equity. It's quite important to covering a better contribution margin than last year.
We can explain that internally with that mechanism, so it's important to stay on the pedal to passing through higher interest rates to the market. The second parameter also very important, because we investing in digitalization, we investing in digital excellence. We would like to reaching a better operational excellence and at the end of the day, a better cost-income ratio. The switch of cost-income ratio of minus 300 basis, base points means a cost-income ratio of 52.2% results in 180 basis points better return on equity. There's also a huge leverage to covering more efficiency in our leasing business to getting the better digital excellence, and that's the way we would like to go through better cost-income ratio and at the end of the day, that will result in better return on equity.
Last but not least, equity ratio. You will ask, "Well, what's about equity ratio? How would you like to steer your equity ratio?" It's quite easy. To achieving our targets in new business growth that will bring us over the next years a lower equity ratio because we have enough space, enough room in our equity to getting more new business, to widening our balance sheet at the end of the day. A more efficient capital allocation will bring us lower equity ratio. If we are closer to our goal of 16 or our minimum target level here is 16.8, that means minus 400 basis points results in 280 basis points better return on equity.
All that three parameters and indicators, may vectors, you can call it like you want, are very important and we took and will take the right action on each of it. Expanding and further growth will become or will result in a better and more efficient equity ratio. Widening our CM2 margin will result in a better CM2 margin at the end of the day, and we will see a better return on equity and also more cost efficiency will bring us better return on equity. On this slide you see two metrics on the left hand, with 20% equity ratio, and there you can see in what direction we move from cost-income ratio. On the one hand CM2 margin, on the other hand, the way is clear and the process clear.
We would like to move from the bottom left to the top right. That way. On the right hand you see the same metrics with equity ratio of 16%. Over the next years we would like to move into a better return on equity. At first in the structure of our new business and in the second step also you will see that better return on equity on our balance sheet and on our P&L. Let me take a look together into the future. What about the outlook? Would like to share with you the guidance for 2023 and 2024. We expect an increase of new business of EUR 2.6 billion-EUR 2.8 billion in 2023, and we continue to aim for leasing new business of around EUR 3.4 billion in 2024.
A quite important parameter to having a more efficient equity ratio. With our portfolio expanding, we expect also our profit reach, EUR 80 million-EUR 90 million for that year, for 2023 and EUR 120 million in 2024. This already accounts for our digital investment, which I introduced earlier, that's important to reflect that right. On the long term standing guidance on our equity ratio, it continues to remain at above 16%. This ensures good lending possibilities in the financial market. With our growth, we will come closer to the 16%, of course, but we would like to cover, equity ratio from a long-term run and above the target. In light of our digital investment program over the upcoming years, our cost income ratio is expected to remain slightly above the 55% mark in 2023.
In 2024, we expect to drive this down again to below 55%. Below 55% as a midterm target. On the long run, we would like to go below 50%. Given the high quality of our current portfolio and continuously strong payment behavior of our customers, we aim for a loss rate in 2023 and 2024 of 1.5% or less. For 2023 and 2024, we aim for a contribution margin to close to 17%, as I mentioned before. Again, it depends on the further dynamics in interest environment. At the moment, as I mentioned, it looks good. To summarize the today's things what we talked about, I would like to say four important things. First, we delivered on our targets in the last quarters, in the last year.
Second, we have clear and ambitious goals. Third, each of these goals is linked to our return on equity, and you can deal with that with a new GPS. That's quite important to steering internally on the one hand, and also to measuring externally and to evaluate the company. Fourth, we took the investment necessary to achieve these goals from short-term and also from a long-term run. Thank you very much. Now we are ready for your question.
Yeah. Thank you for your presentation, Dr. Hirsch. This was really interesting and a lot of information, I guess there will be a lot of questions. First of all, we asked our guests here in Frankfurt for their questions, and we have a microphone ready for you. Would you be so kind as to briefly state your name? The first question, I think, comes from Mr. Pfänder. Thank you.
Yes, hello. Thank you. I would like to come back on your digitalization initiative. You showed that you are going to invest around EUR 50 million in the next years. Could you speak about the operational risk to this? Is this amount you flagged at risk to increase? For example, did you already sign on the companies which might help GRENKE to go this way? What are the execution risk along the line you're planning to execute on that? Secondly, you also showed efficiency gains the next years. I would be interested, what is going into this number? Are these expected cost savings or also revenue items? I at least would assume that if it's up and running the system, you should also be able to accelerate top-line growth.
Is there anything also in feeding into this number? Thank you.
Yes. Thank you. At first, expenses we show in the investment volume over three years. It's let's say, our best guess at the moment. So it's not each contract signed. It's, we have a plan. It's a roadmap. We call it internally digital moves. We would like to go forward with that digital move step by step because you can't do anything at the same time, and you should do that step by step. I would like to say roughly a third is locked in and more or less fixed in terms of cost. The rest, that's our best guess assumption at the moment. Could be better, could be a bit lower, could be a bit higher. That's the thing we have to deal with.
It's not that we sign, let's say EUR 45 million contract with a company or something like that. In terms of efficiency, James, we show here our cost savings. Cost savings for sales and administration. Of course, the program will also spend on top line. The digitalization, better digitalization will also spend on how can you deal with the markets? How fast are you able to deliver new products made to markets? How fast can you may expand in newer markets and so on. The cost savings here or the efficiency savings is only cost, so without any bottom line impact.
Okay. Next question from Mr. Fuhrberg.
Yeah. Hi. Marius Fuhrberg from Berenberg . Also on the digitalization program, I think that your speed and your decision-making for the leasing contracts was always one of your core strengths. Now you say that you want to become even quicker. Could you give us a little bit more detail on which process steps will become even more digitized and where the efficiency gains lie in the whole process? The second question, once you implemented every steps of this program. Where do you expect the CIR to be afterwards? Because I think that this is or this should be a more sustainable effect then.
Maybe the third one also on this program, what is the current level of server and hardware costs that you have to get rid of with the program?
Thank you for your question. I would like to start with the last one. May we check the number in more detail, but it's roughly EUR 8 million-EUR 10 million. The hardware cost, it's also part of the cost of the extra investment. Means we save also the cost for the today's infrastructure. We have today hardware in place. You will go into cloud. You have two years parallel systems. It costs money. It's roughly EUR 8 million-EUR 10 million. That double impact and after two years when you implement the cloud fully, then you will not further need new investments or the new write-off of hardware. The second question was, what is the cost income ratio, let's say at the end of the day after that investment program?
It's not that easy to say because cost income ratio is always both cost and income. May I would like to give another answer. With that program from a long-term run and when you like to go to plan like a steady state at GRENKE, my steady state scenario is 12% growth in new business and 6% in costs. That's the operational leverage we would like to cover with our power in the organization, with our power in the business model, and with that digitalization program. The cost income ratio then is more or less a result of that. We would like to from a long-term run and from the today's mechanism, less than 50%, yes.
I think the, let's say, steady state approach is a bit easier and a bit more clear to say 12% new business growth and 6% cost growth. The first question, one of the most important things is instant decision. When you talk about instant decision or we then just to take into account two things. The one hand is what is the real process on the market? Is it made possible or would you like to have in full instant decision, means a decision by a machine at the end of the day? The technical solution for instant decision. I would like to have that we are able to be technically able, having an instant decision means a decision in between seconds.
If you go for it in each market, in each case, that's another question. Maybe it's good to having people involved to taking care for a decision, to making the final check, whatever. In terms of instant decision, there's also one huge leverage because when we talk about credit decision, everybody is talking about what about the yes and we would like to go for it. I say no. The most leverage I see is a fast no. May you know, our acceptance rate is roughly 75%, so in 25% of the case we say no.
To having a very fast no is also very efficient, to having that made by a machine, whatever, then may I would like to look later on that, or may I ask a colleague or whatever, or may I can switch a parameter a bit lower, a lease term, a bit longer lease term, whatever. Also the fast no in the process of instant decisioning is very, very important. There's a huge leverage also in the fast yes, of course, and that instant decision process will bring us to a leasing decision in between seconds and not in between some minutes.
Mr. Lukesch, do you still have a question then? Thank you.
Yes. Hello. Tobias Lukesch from Kepler Cheuvreux. I would like to touch on three topics, if I may. First, on Q4 P&L development. Secondly, again, on the digital excellence program. Thirdly, on capital management and payouts. I would go one by one if okay for you. On the Q4 P&L line items, could you please elaborate on the strong increase of the profit from the new business and also on the losses from disposals which have been or which have shown basically a significant increase or shift, you know, from the positive nine months development. Thank you.
Yes, both a bit fluctuation over the year in the new business. It's because of the strong new business we achieved over the whole year at the end of the day, especially in Q4, and that's why also the increment, the cost of new business arising and then the IDC we saw lay before in the calculation, and it's always linked to the Q4 performance, and that's why the new business gains are rising. From a balance sheet perspective, it's always at the end of the year in Q4, you go to, let's say, recalculate the full year. We see the full year results also for gains and losses and disposals for new business. You say, okay, the full year result minus EUR 9 million, that's your Q4.
It's a bit different in Q1, Q2 and Q3. You go for more or less for each quarter. In the last quarter, you know everything about the calculation, then especially that both figures, there can be some fluctuation. We saw that also over the last years. In terms of losses of disposal, it's also the same. We see that some contracts running longer, some contracts or more contracts going in retention. Then we have also the valuation impact that you have contracts running off. You see the high depreciation of the write-off of the residual value, the longer running retention bring over the time the earnings. There's a time lag we discussed about, I think, two-three years ago.
As always, when there's retention a bit longer, then you see that light slightly negative impact.
No deterioration basically in the asset prices?
No, no.
Secondly, again, on the digital excellence program, you have touched on it maybe on the number EUR 8 million-EUR 10 million. I get that correctly? You mean that's an impact over two years, not per annum, but EUR 8 million-EUR 10 million within two years of this kind of running these programs, you know, it's like in parallel?
Yes, because in that two years you will have, let's say, two time run costs.
Yeah.
In IT. After that two years you will have then other run costs for a cloud, for the new system, but you will not have the further run costs of the previous system. In that two years, that impact is like a parallel impact and only for that two years, yeah.
Okay. It's a EUR 4 million-EUR 5 million per year, basically.
EUR 45 million?
Four to five.
Is it-
Yeah, yeah.
Up to five, four.
No, no. It's roughly EUR 8 million-EUR 10 million per year.
Per year.
Yeah, yeah.
Okay. Is there any split you may provide with regards to initiatives, products or services which are covered by the first, EUR 15 million you have planned for 2023?
The most important thing is the cloud transformation because all the other technical things are based on the new technologies. That is the most important thing for that year.
Okay. Thirdly, on the capital management and the payouts, by when do you expect you would hit the 16% equity ratio given the planned leasing business growth you have in mind, given the development of balances of cash and cash equivalents you see basically in the balance sheet, and thirdly, with regards to the loss ratio you expect for this time? Thank you.
An equity ratio when we, let's say, run forward, with our new business planning of 16%, I see in 2025, May 2026, yeah, but not earlier. 2025 should be a bit more closer to 17% from our plannings and in 2026 that's the level where you see the 16% or very close to 16%.
Would that imply a kind of flattish development of cash and cash balances, basically? Are you at the level where you think now you have?
Yeah.
Run rate?
The level today is quite fair to assume could be a bit more, a bit less, but the level we have today is quite fair, yeah.
I guess on the loss rate, you would potentially be again in a range of 1.4%-1.7%, kind of or?
From a long-term run, an average of 1.5% is fair. From today's perspective, I see more 1.3%-1.6%, but of course you can also say 1.3%-1.7%, it's okay. The average of 1.5% from a long-term run is fair for our portfolio. It's quite stable over the last years when you see the average. Looking forward, with today's business, we ride for short-term run 1.3%, from a long-term run, 1.5% is okay, yeah.
Thank you.
We had a question from Mengxian Sun from Deutsche Bank.
Thank you very much. This is Mengxian Sun from Deutsche Bank. Also three questions from my side. The first one is that if we look at your asset book that we see the recovery is already ongoing, the NNI hasn't showed a positive trend here yet. The question is when do we expect NNI to come back to positive growth again? The second question is on your provisioning. If I look at the stage three provisioning in this quarter, it decreased by a substantial extent higher than the average level. Are there any write-backs in this quarters regarding to the provision? The last question is also regarding to the IT budget and competition landscape. Thank you very much for sharing with us the informations that you are third largest players in Germany, France and Italy.
Can you share with us a little bit information about the largest players and how do you see with the IT investment, how can you increase your competitive advantage with it? Thank you.
Yeah. I start with the last question. The largest player, if I'm right, is BNP. It's always bank based. Yeah, BNP Paribas is the largest. The second one, I'm... Do you get it?
Give us a minute.
It's always the same. It's the players around us, the bigger one is that's always a bank-dependent leasing company. In terms of NII, I see the growth that year because you are right on the one hand, it depends on the leasing receivables. What is about the growth of leasing receivables, we saw last year that the leasing receivables are growing again, but you have also the impact of the years 2020- 2021 in the portfolio. We expect that we will reach per end of that year, beginning next year, the level of 2019 in the leasing receivables, and that is a base for growing in net interest income, and that should be the case that year.
In terms of risk provisioning and level three, level two, there was no extraordinary impact or something like that. There was one thing that we took care for some receivables which were with a risk provision of 100%, so some bad debts. It's more technical in terms of our how we go forward with a bad debt collection. In our local accounting, we always look that we take care for let's say in the best-case bad debt collection.
We take care for bad debts in our accountings and may going for write-off of EUR 100, but you have a gross receivable of EUR 100 and also risk provisioning of EUR 100. That we switched a bit because of the NPL situation, and in some cases it was a long term, and then you switch it. You see that also in the balance sheet and the gross bad debt is lower, but also the risk provisioning is lower. There was no extraordinary impact in terms of missed payments and extra write-offs or something like that.
Yeah. We have the answer ready for that.
That's DLL De Lage Landen. The second one is DLL De Lage Landen, yeah.
Okay. There were further questions from, I think, Dr. Häßler, please.
Philip Häßler . Can you hear me?
Yeah.
Philip Hessler from Pareto. I have two questions, please. Firstly, on the other interest revenue, which was quite strong in Q4 with EUR 8 million. Was it due to a one-off or just to the higher interest rates? If it was due to the higher interest rates, maybe you can give us an idea how this will develop in 2023. On the funding strategy, funding via unsecured senior funding is quite expensive currently and will probably stay so. To what extent can you further increase the share of deposit funding? Currently I think it's around 25%. What do you see there as the upper limit? Thank you.
Yes. At first in the other interest income, there was an extraordinary impact. That's right. It was linked to a repayment of VAT from the government. There it was 10 years ago. That is not the VAT repayment, it's interest on that VAT repayment, and it was roughly EUR 7 million. It has nothing to do with the higher interest rates or something like that. In terms of funding mix, on the one hand, yes, we can go for more deposit business, may 30%. We always said a third could be fair, may could also be 40% possible. We would like to stick in all our pillars because market environment changes nearly each year.
It's important to having the deposit business, to having ABCP funding, and to having senior unsecured funding, and having as best as we can in each box, a wide range of instruments. It's not the goal to have tomorrow 30% or 40% deposit business. It depends on market environment. The Grenke Bank is a very important player. When you ask me what is a theoretically possible share, then I would like to say may 40%-50%. From our point of view, we would like to take care that each box is important and we would like to play in each box. I think the level of 25%-30% is fair and a very good and healthy level for us.
I just see that we have received one question from our participant on the webcast, and the question is touching the ROE and whether the 15% we saw in the past would be possible again. This is the question on whether the new cost income ratio will or has to be considered a burden on it.
Yeah, that's right. We talked about the metrics on one of our pages, and there in the blue areas, you can see what could be the new future. The 11% is more on the upper end, on the left hand, and we would like to move on the bottom. Sorry, on the left hand, and we would like to move on the right hand on the top.
Mm-hmm.
There is more than 11%. It's at the end stage, more than 15%. The next step should be having a return on equity of more than 10%, and the level after is to achieving a return on equity of more than 15%. First step, as I mentioned before, is to covering that in our new business portfolio with the structure and the KPIs we provided you today. 11% is not the new normal. With our guidance of that year and the current equity, we will see a level like this year for 2023, that's for sure, but it's not the new normal. It's just a question of time and delivering new business figures.
Mm-hmm. We have another question in the room from Mr. Fuhrberg, please.
Yeah. Thank you. One follow-up also on the ROE. You just mentioned that you want to move up to the top right hand of your graph here. Given that you want to achieve an equity ratio of 60% by 2026, I think it was, and that your cost income ratio should also improve by then due to the digitalization program, is it your real target to achieve an ROE of more than 20% by, let's say, 2027 then? That would be one question. The second one, just an update question on the market entry in the USA. I think to mention that, or to remind that you started in Arizona with your business. How are things going there?
Do you already consider moving into another state and, or how does your, expansion plans proceed in the USA?
First, I think important is to make the next steps. Today, we're talking about an ROE of 8%-9% looking to the balance sheet. On the new business level, we saw 11%. To go in the direction of 20, that's quite important. The parameters are more or less in our hands. CM2 Cost income ratio and equity. With that parameters, we are able to steer that in the right direction. If we talk in three or four years about more than 20% or not, then maybe we can talk in two years. I think important for us is now to go that way to going forward and to move in the right direction.
The right direction is closer to 15% and then closer to 20% in terms of ROE, and that depends on moving in the right direction on each of the KPIs I presented you. Second one, USA is going well. It's always the same when you start a new market, and of course, the U.S. market is quite huge. It's important to go out to talking to dealers, winning dealers, and that's the colleagues in Arizona are doing. Their development is absolutely in plan, and we are also in planning to opening the second branch. The second company in the U.S. that will be in Illinois, Chicago, and that's in the planning process, and we will do that year.
Okay. Time is flying as always. We have time for another question from our webcast, which is again touching on the fact why a quick decision is so important when you compare deciding in a few seconds in contrast to deciding in a few minutes. Why we benefit from this quick decision.
Why it's important, the quick decision. In our business, it's no leasing, no lessee, sorry, is waking up in the morning and say, "Hey, today I go for a leasing contract." Nobody's waking up in the morning and say, "Today I go for a leasing contract with GRENKE." May a small, medium enterprise entrepreneur, whatever, is waking up and say, "Hey, I need to go to invest in IT. I need to go to invest in whatever infrastructure," and is talking to a dealer, a reseller. The reseller say, "Hey, you can buy it or you can lease it." It's a question of time and a question of seconds. When you can provide the reseller and the lessee in between seconds, "Hey, that's our offer.
You can lease it for EUR 100 per month, four years, take it or leave it." That is very, very important because nobody would like to wait. It's the base for our business today. It's not important but may tomorrow to implement our business idea also in like online shop or something like that, because that's also a question of seconds. Some dealers are working with online shops more and more, that's why nobody of our clients is really asking for leasing. They are asking to taking an investment, taking an object, and we would like the clients to lease the object. Yeah. That's why speed is that important in our business.
Yeah. Thank you. Given that we have time to talk in here in the room, I would prefer to answer another question from our webcast participants. This is regarding the debt market in H1. Whether we are willing to tap into the public market again. Everything that we can elaborate on this would be helpful. Duration, size, anything we might be willing to or able to share would be helpful.
Yes, it's one opportunity. It's one opportunity in our planning, absolutely. The type of funding means, duration, and the best way duration between two and five years because that's the duration of our new business portfolio and we would like to cover the maturities of the asset as I described before. Size, it's depends on new business volume on the one hand, but depends also on the market on the other hand, to going public with about, may you know, it should be a minimum EUR 200 million, it could also be more. That's one opportunity, again, to doing that. It depends on market environment. We have also other boxes and pillars in our funding. If the market is working and willing, then we are ready to go for it.
Thank you. I think there was another question from Mr. Pfänder.
Yes, one follow-up, please. Could you talk a little bit about your CM2 margin development in the case for, let's say, a larger funding exercise in senior unsecured? I guess, yeah, it's much more costly in this year, maybe even last year, and your cheaper funding is running off. Is your CM2 margin maybe even in these quarters below that what we saw last year and recovering just later, or how do you see that?
The last question, the CM2 margin over the last weeks developed very good, and we will present in two weeks our new business figures, and we can or I can say that the CM2 margin will be better than the average of last year. Because we are able to pass through our higher interest rates. Looking to our CM2 and the interest rate we use to calculate it, we always taking each day the current market environment of interest rates. On the one hand, we taking our credit spreads of our former funding, of our existing funding, that's right. We taking the current market environment each day.
That's very sensitive in terms of changing interest rates, means when there's a change in interest rates because of an ECB decision or whatever, that's on the next day reflected in our CM2. It's not based if we say, "Okay, what is our cost of funding of the past?" We like to say, "What is our cost of funding if we would like to fund that leasing contract today with today's interest yield curve?" Of course, with our credit spreads of the past, because that's, at the end of the day, something like the best knowledge. We asking each day, what is the refinancing cost? It's theoretically what could be the refinancing cost for that contract today.
There, again, there's a high sensitivity, and it's not that we took only the fixed rate of the past, and when, bond is running off, then everything is changing.
Okay, we try not to overrun more than five minutes, which is why we have time for a last question, and Mr. Lukesch, please.
Yes, one or two if I may. On the competition and just on the, on the funding costs you just mentioned, I was wondering, you've mentioned that main competitors remain bank-dependent leasing companies. Expecting that they should have a direct or indirect funding advantage compared to you, how do you see the competition and pricing development, basically? What have you seen over the last months, how are you expecting to this going forward? Secondly, second one, very quick one if I may. On the deposits, you mentioned a 25%-30% share of deposit funding. I mean, how fast are you planning to reach that? Could that be reached by the end of the year already?
Maybe the last one. It's not a real goal. The portion of funding at Grenke Bank is, at the end of the day, a result of what are the opportunities of the market. It could be that we have a level of 25% per end of the year. It could also be that a stable 20% if you're having the possibility to going for bonds quite efficient with two, three, whatever, bigger issues, then maybe the deposit business will be a bit lower. If you see, hey, the deposit business is developing very good, maybe the bond market is not that easy, then the share or the portion of Grenke Bank will be a bit higher. In terms of pricing, that's very interesting.
It was very interesting last year because as ECB started rising interest rates, not each competitor started raising leasing conditions. Especially in Q3 and with beginning of Q4, it was not really clear. Then in November and December, each competitor across the globe in each market go for higher leasing conditions, higher interest rates, so it was not a question of pricing. The second one in our business, as I mentioned before, speed is much more important than pricing. It's not that the lessee is compare, "Okay, I pay EUR 100 in May, then there I pay EUR 99." The lessee is not waiting to compare it.
When you are fast and say, "It costs EUR 100," maybe you say, "Okay, I go," or not waiting for a bank-dependent competitor, "Okay, maybe in 10 minutes I will get a second offer." That's very important, again, the speed, in our business. It's not the price and not only the price to the competitors. That depends more on the dealer, and there also the speed is quite important.
Okay.
Mm-hmm.
Good. Last question from you.
I just wonder why you give us in this matrix-
Mm-hmm
... your potential return on equity, your potential cost income ratio, it is so far out that it's even not an intermediate goal for you.
Mm-hmm.
What is the sense of it?
The sense of it is to combine our internal figures with, let's say, common capital market figure Return on Equity. To combine it, what does it mean 17% CM2? What does it mean 55% Cost Income Ratio or maybe 50%- 52%? That's important to getting the sensitivity. What will happen if we switch our parameters and we move our CM2 from 16%- 17%? What will happen if we move our Cost Income Ratio from 55%- 52%, whatever, and what will happen-
In the past, we had, a cost income ratio below 50%.
[audio distortion] to reach that and when.
Yeah, we give the perspective to go step by step. To reach first, we start our Digital Excellence program. It has to invest, of course. There the cost income ratio is 55%, a bit higher over the next year or that year. After that year, we will come less than 55%. From a long-term run, we will reach a cost income ratio less than 50%, but we have to move forward. It's more, let's say an instrument to steering the parameters and see what could happen. Maybe you can also deal with 52.5% or whatever. With the parameters, you can deal with 17% Contribution Margin 2. We had that in the past. We will see the figures in two weeks for new business.
Cost return on equity and the equity portion, that's a question of the growth speed. You are right, the cost income ratio of 49, that's a long-term run. The both parameters, equity ratio and the parameter Contribution Margin 2, it's more short-term run. It's a question, how the path in that matrix may first we will see a better cost Contribution Margin 2. With the growth, we will see a more efficient capital allocation. With our digital excellence program, the cost income ratio will move down.
Okay, thank you. I think this was extremely helpful explaining this. Thank you for the question. This concludes our conference here in Frankfurt. Thank you very much for coming. Thanks for your support. Yeah, have a pleasant day in Frankfurt. Thank you.
Thank you.