A warm welcome to everybody on this call on the quarterly results for the nine months ended 30th September 2025 for the ProCredit Group. My name is Hubert Spechtenhauser. I am the Chairman of the Management Board. As always, I am joined by Christian Dagrosa, our Chief Financial Officer. We plan for some 30 minutes to cover today's call. As always, the presentation is also available on our website. We will, of course, leave sufficient time for any questions you may have. Let me also provide you with the usual warning to pay particular attention to the cautionary statements regarding forward-looking comments that you will find at the end of the results presentation. We follow the familiar structure for today's presentation.
I will take you through the sections covering the highlights of the nine-month period and outlook, while Christian will take you through the details of our financial results, risk, and asset quality indicators. When we outlined our renewed strategy at the Capital Markets Day in March 2024, we made it clear that 2024 and 2025 would serve as the foundation years for the next phase of ProCredit's development. These are the years in which we deliberately reshaped the commercial engine of the group, building the capabilities needed for faster, more scalable growth while investing in people, infrastructure, and technology to ensure durability and efficiency over the long term. After a very strong 2024 and half-year 2025, quarter three shows that the new strategic direction has firmly taken hold. Business activity across our banks was vibrant, customer demand remained solid, and our lending franchise continued to be expanded at pace.
Excluding foreign exchange effects, the loan portfolio grew by a strong 10.2% in just nine months, with contributions from all our Eastern and Southeastern European banks, putting us firmly on track for our full-year target of around 12%. Our focus on micro, small, and retail clients, segments where we see the best balance of margin diversification and risk continues to pay off. The shift towards a more granular portfolio is clearly visible and supports both underlying profitability and resilience. Almost 80% of the strong top-line growth of EUR 712 million, excluding foreign exchange effects, came from these segments. Profitability is below expectations and below our ambitions. Let me say this in no uncertain terms. Driven particularly by a visible and unexpected one-time increase in loss allowances in quarter three. We will cover the details later.
Underlying income dynamics are, however, beginning to show important positive trends from the different balance sheet transformation initiatives. One example is the sequential quarter-on-quarter expansion in the net interest margin. Further fortifying the drivers behind these trends will remain a key strategic focus for the group for the coming years. It is worth highlighting that we see a granular, broad-based contribution by most of our banks to our group performance, despite a still overall challenging macro environment. In Ukraine, we have grown our loan portfolio strongly, following the investment guarantee with the Federal Republic of Germany from late 2024 and increased local demand for investments. In Ecuador, market conditions continue to be difficult, and the bank's results remain a headwind for the overall nine-month group performance. Quarter-on-quarter, we are beginning to see a visibly positive trend. Christian will cover the details.
At the same time, the improving trends in Ecuador form a better basis to explore strategic options regarding our bank, including a potential majority sale of our shareholding in the entity. I will cover the medium-term guidance in more details on a separate slide at the end of the presentation. Let me highlight that the increase in provisions and revision of the short-term guidance clearly do not affect our medium-term outlook in any form. Our key strategic initiatives are well on track, and we can confidently confirm the medium-term objectives we set at our Capital Markets Day in 2024. This slide complements my summary of the performance. We see strong top-line progress in our core markets, partially offset by pronounced foreign exchange effects.
A still elevated cost-income ratio due to last year's investments in strategic areas and continued high refinancing costs, and a solid capital base with our CET1 ratio remaining around 13%. The additional provisions booked in quarter three increased our cost of risk for the period and had a visible effect on our P&L. Nonetheless, we remain convinced that credit risk continues to be a strong point of the group, which is highlighted once more by the very low share of Stage 3 loans of 2.1%. This slide reflects the execution of our strategy in a different light, the progress made since early 2024. Over the last 21 months, we achieved substantial loan growth within smaller volume segments and across geographies.
For example, in our smaller markets, we have grown by 26% over that period, even without adjusting for FX effects, thereby coming closer to what we believe is a critical size of banks in these countries. In the strategically important lower volume client segments, including small, micro, and private clients, we managed to grow by a strong 36% over that period. Our approach to deposits mirrors our approach to granularity in lending. We are gradually enhancing our positioning for private clients in our markets, driving a broad-based retail strategy in recognition of the fact that retail deposits represent the most important source of refinancing across our markets. Over the last 21 months, we have added tens of thousands of new retail clients, leading to a strong increase in our retail deposit base.
While deposit rates remain elevated in most of our markets, we are confident that our expanding retail customer base will over time not only fuel our strong SME lending growth, but also contribute to structurally lowering our refinancing costs. We are satisfied with the pace and momentum of our structural transformation, yet we recognize that the true measure of success in our retail strategy will ultimately be the growing share of cost-efficient sight deposits. As we expect this indicator to grow down the line, we expect to see a tangible and meaningful positive impact on our P&L over time. Let's look at our map. We continue to see strong broad-based expansion in our lending business across our markets, with growth rates in the double-digit range in most banks for the nine-month period. Please note, the growth rates on these slides are in local currency terms.
Our strong business dynamics are supported by solid GDP growth in our region, low banking sector penetration, and increasing geopolitical and macroeconomic relevance of our markets. Our MSME clients show increased appetite for investments despite broader and persistent uncertainty, driven largely by global, but in some cases, also country-specific political uncertainty. Domestic demand is increasing strongly, fueled by rapidly rising wages, increased public and private investment, and easing inflation. Higher income levels in our countries are, of course, an additional pressure point to what are already highly constrained labor markets. At the same time, these dynamics also provide opportunities for us and further highlight the attractiveness of the retail sector as a fast-growing and long-term stable source of financing.
A standout in our business development is our performance in Ukraine, where we grew by around 22% in local currency terms, in part driven by a high backlog of demand for investments, but certainly underlying the quality of our institution and staff, as well as the strategic value of our partnerships with governments and supranational institutions, which all show a special commitment to this market in what continue to be difficult times for people and businesses. As mentioned, we pursued this higher level of growth following the investment guarantee signed at the end of last year. Before we move on, let me reemphasize that we view prudent credit risk management as one of ProCredit's core strengths.
Our teams across the group combine deep local knowledge and tight client relations with rigorous credit processes, allowing us to grow dynamically while managing risks in a way that sets us apart from other banks in our region. Our portfolio has maintained a consistently low cost of risk through the cycle, which underlines the resilience of our business model and the quality of our client relationships. Having said that, let me address the provisioning recorded in the third quarter as outlined in our ad hoc announcement from October 28th. These provisions relate to a sub-portfolio of exposures in project finance for renewable energy projects in the southeastern European segment, mainly due to delays in construction and connection. These are isolated exposures and are by no means indicative for any broader issue, neither at the portfolio level, nor with respect to specific markets or industry sectors.
Following the provisions built in quarter three, we at this juncture see very limited downside risk in terms of additional allowances, even in the event of a potential default classification. For the fourth quarter, we do not expect a material additional provisioning beyond the normal course of business. To sum up, our portfolio quality remains strong and our medium-term assumptions for credit risk remain unchanged. In 2024, we made substantial progress in recruitment and branch network modernization. As a result, our headcount remained broadly stable in 2025, and we had only marginal further additions to our branch footprint. We continued to invest in IT. Our group software company, Quipu, is propelling key innovation initiatives such as digital onboarding for retail clients, enhanced e-banking and mobile banking platforms, installment-based credit card offerings, and improved CRM systems, just to name a few.
These developments are designed to enable us serving larger numbers of retail clients efficiently while offering a highly competitive product suite. The product rollouts are ongoing and in progress. For some parts, already group-wide. In some instances, still on a single bank level. It is clear that the digital transformation and investment into technology and innovation is an ongoing exercise and will ultimately remain an investment focus going forward. On marketing, we have deliberately slowed the pace of marketing spend, shifting towards more targeted campaigns, promoting new products and functionalities. Recognizing that strategic investments take time to yield measurable results, we expect these growth catalysts to begin contributing more meaningful over the coming quarters. With this, let me give the word to Christian.
Thank you, Hubert, and good afternoon to everyone now also from my side and welcome to our presentation. Let us start with the business performance, and as usual, I will add nuances to the key messages that Hubert already delivered. Top-line growth of our loan portfolio continues to be strong. Adjusted for FX effect, our portfolio grew a strong EUR 712 million or 10.2%. On the level of the segments, this reflected an impressive growth rate of 30% in micro and 23% in retail in a nine-month period. These segments are becoming increasingly more prominent in our overall portfolio mix, and we see our long-envisioned balance sheet transformation gradually unfolding before our eyes. Since the inception of our new business strategy, the share of micro loans has almost doubled to 4%, and the share of retail loans increased by 3 percentage points to more than 13%.
The small segment remained steady at around 30%. Overall, we increased the share of lower volume segments by 5 percentage points from 42%-47%, which is excellent progress towards our 50% target considering that less than two years have passed. Without neglecting the medium segment in which we also continue to grow our business. On the deposit side, we are seeing continued progress in increasing the share of retail deposits within our overall deposit base and a strong rebound of MSME deposits after more pronounced outflows in the seasonally weaker first half of the year. In quarter three alone, we grew a strong EUR 401 million or 4.9% in local currency terms, offsetting almost in full the more muted development in half-year one.
The share of retail deposits in total deposits increased overall by 3 percentage points since the inception of our strategy, reflecting our focus and efforts in this area. However, as Hubert already mentioned, going forward, we will focus our efforts in a more targeted way to also increase our share in sight deposits in order to optimize refinancing costs and solidify margins. In that regard, we already see progress in this year. Though the top-line growth figure in deposits is a bit lower this year compared to last year, more than 50% of this year's growth came from granular sight and savings deposits. Last year, this figure stood at only 19%. Within the retail segment, the contribution from sight and savings deposits to total retail deposits growth was even at 60%, up by 51 percentage points from only 9% last year.
We view these developments as very encouraging and will continue to advance measures that reinforce these dynamics in the coming quarters. Let's move to the P&L. Operating income for the nine-month period was around 2% below the previous year period, mainly due to a EUR 19 million decline in interest income from cash and cash equivalents related to lower policy rates in this year. Net fee income remains resilient and grew through expanding client base and transaction volumes. The cost-income ratio is elevated, reflecting the high upfront investments undertaken especially in 2024, and persistently high refinancing costs in most of our markets. With respect to quarter three 2024, this third quarter's operating income was almost on par, indicating that the year-on-year gap caused by the repricing of assets, on the back of lower policy rates, has now been largely closed by strong volume effects. Let's move on.
Quarter-on-quarter, net interest income increased by EUR 3.1 million. That's a jump of almost 4%, indicating that pricing effects no longer play an important role in the short-term dynamics of this line item. The net interest margin slightly increased for a second consecutive quarter by 6 basis points. At the same time, we view this positive trend with some degree of caution as local market rates for deposits persist at relatively high levels. Year-on-year, we see how the substantial volume effects from a EUR 700 million balance sheet growth have been fully offset by pricing effects. Overall, net interest income is down by EUR 9.8 million with respect to 2024. Comparing quarter three 2024 with quarter three 2025, we also see here this gap is largely closed, with both quarters net interest income broadly on par at around EUR 90 million. On to net fee income.
Year-on-year, net fee income increased by EUR 3.8 million, or 5.6%, reflecting above all higher income from FX transactions and payment services. Income from cards decreased by EUR 1.6 million, mainly as expenses charged by card providers have grown over proportionally. Quarter-on-quarter, we see net fee income approximately EUR 1 million above the level of quarter three 2024, but about EUR 500,000 below quarter two. Also here, higher expenses to card providers are the major driver. Quarter three personnel and administrative expenses increased by EUR 3.2 million with respect to quarter two, especially driven by higher staff expenses. The quarter three figure includes two visible one-offs. One, an accounting correction related to the capitalization of IT implementation works, the other, an increase in severance payments.
In absence of these non-recurring effects, personnel expenses would have only increased marginally, reflecting above all the group-wide salary review conducted in September, and the fact that staff numbers have remained stable since the beginning of the year. Similarly, administrative costs remain stable against quarter two. The reduction of around EUR 1 million was largely related to a one-time increase in consulting expenses in the previous quarter. Year-on-year, we've seen an increase in personnel and administrative expenses of around EUR 13.6 million, which largely relates to the investments undertaken in the course of the year 2024. Personnel expenses are the biggest contributor, growing by around EUR 10.4 million or 9.8%, which links more or less directly to the 10% increase in average staff numbers for the first nine months of 2025 with respect to the first nine months of 2024.
Within the moderate 2.9% increase in administrative expenses, we see that the group continues to invest heavily in IT. The EUR 4.3 million increase relates to licenses and higher maintenance fees. Marketing campaigns are targeted more directly to promote rollout of new products and functionalities. Turning to loss allowances. Hubert already gave all the details to the heightened loss allowance in quarter three. As highlighted, the sub-portfolio in question relates foremost to project finance exposures, which were downgraded due to construction delays and curtailments. These are long-term projects, longer investment horizons lie in nature of project finance, the changes in cash flow projections do affect the provisioning materially. Let me reaffirm what Hubert said.
With the current level of provisions for this sub-portfolio, we see limited P&L downside even in case of any further deterioration of these projects, with potential releases in a hypothetical upside scenario. Based on our analysis, we do not expect any similar deterioration occurring in other project finance exposures in our portfolio. As Hubert mentioned, we'll continue to manage credit risk effectively and prudently, and this is, last but not least, reflected in the stock of management overlays, which remains high and prudent on a level of around EUR 62 million or one-third of total loss allowance. The share of defaulted loans remains stable and credit quality across our market continues to be solid. The provisioning event in quarter three related to deteriorations within the Stage 2 portfolio. Both Stage 2 and Stage 3 indicators remain stable quarter on quarter. Let's look at segment performance.
Our Southeastern and Eastern European operations continue to deliver strong growth with annualized ROEs in the double digits and cost-income ratios at healthy level. The additional provisions in quarter three fall primarily onto the Southeastern Europe segment, bringing the segment profitability temporarily down to around 11.5%. Our Ecuadorian entity continues to weigh on results with a segment loss of EUR 6.4 million as of September. Importantly, the financial performance of the bank in Ecuador is showing a visible improvement in quarter three. Low interest rates on deposits and a reduction in excess liquidity has helped to EUR 1 million quarter on quarter increase in net interest income, reducing the structural loss before tax and loss allowance by more than 60% with respect to the previous quarters to EUR 800,000. The cost-income ratio improved by more than 50 percentage points in quarter three, but remains above 100%.
Where there's still a lot of work ahead in Ecuador, we are encouraged by these trends and continue to focus our efforts in this direction together with the local management. Moving on to our regulatory capital, very briefly. Our regulatory capital position remains robust. As of September 30, we maintained a CET1 ratio of around 13%, well above regulatory minimums. RWAs continue to increase in line with a strong business growth. Core capital increases through profit retention, net of dividend accrual and other deductions, continue to support the strong growth dynamics. With that, let me give the word back to Hubert for his closing remarks.
Let me conclude this presentation with our short and medium-term outlook. For 2025, we confirmed our target for loan growth of around 12%, adjusted for currency effects. For the CET1 ratio of around 13%. In view of the increased provisioning in quarter three, the return on equity for this year is now expected at around 7%-8%, down from the previous assumption of around 10%, as we can no longer uphold the assumption of continued low cost of risk for the full-year. We also expect the cost-income ratio to come in at around 72% for the full-year, compared to around 70% before. While this revision of return on equity reflects first and foremost the higher cost of risk in 2025, the underlying business remains well on track, both in terms of growth and structural transformation.
The adjustment in the cost-income ratio target mainly reflects the fact that refinancing costs have remained higher than assumed, driven primarily by persistent high market rates for deposits. Moving on to our medium-term guidance. Some of you will be aware that today's call is a special occasion for me, as I will be retiring at the end of February, and Eriola Bibolli will be taking over the Chair of the ProCredit Holding Management Board. This is my final analyst call for the ProCredit Group. Naturally, this gives me reason to reflect not only on our current performance, but also on the strong foundation for the future we have built over the past years.
While the additional loss allowance recorded in the third quarter means that we will not reach our initial financial target for 2025, I want to underline that our confidence in achieving the ambitious medium-term goals outlined at our 2024 Capital Markets Day remains fully intact. Our positioning as a leading MSME bank in our markets, serving more than 80,000 MSME clients across the region, continues to be a unique and invaluable strength. By complementing this strong franchise with an innovative and scalable retail banking proposition, we will be even better placed to secure stable and granular funding to fuel our MSME lending business, reduce refinancing costs, and thereby improve net interest margins, and expand our client base, strengthening non-loan income through broader cross-selling and transactional services.
With key strategic initiatives well on track, from igniting a strong growth and transformation dynamic in all our banks, to progressing and completing strategic investment initiatives, to establishing a significant presence in the retail sector of our markets, we remain self-assured in our path and optimistic about delivering on our medium-term ambitions. Let me summarize once again. We plan to grow our loan portfolio to a volume of above EUR 10 billion, which will allow us to realize significant scaling effects and reduce our cost-income ratio to around 57%. Our return on equity ambition of around 13%-14% remains unchanged and does not include any upside potential from broader reconstruction efforts in Ukraine. We see an upside to our medium-term return on equity in a potential stabilization and reconstruction scenario of around one and a half percentage points. In the medium term, we also remain committed to our dividend policy.
Allow me to add a final remark on Eriola and Christian, who will accompany you going forward on these analyst calls. Eriola has been with ProCredit for over 20 years in different management positions, including being CEO of our successful bank in Kosovo and member of the Management Board of ProCredit Holding since 2023. She knows our markets inside out and is the main driving force behind our comprehensive retail banking strategy. Together with Christian as CFO, this upcoming change demonstrates a strong sense of continuity. I have the highest esteem for both of them, and I wish them all the best in the continued successful execution of our medium-term strategy. Let me conclude our presentation for today. We are now looking forward to taking your questions.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. Our first question comes from Milosz Papst with Edison Group. Please go ahead.
Yes. Hi. Thank you for the presentation and taking my questions. I would like to start maybe by unpacking the change in your guidance for this year. Of course, it is partly due to the one-off loss allowance of EUR 16.6 million, but it is roughly one and a half percentage points, I guess, reduction in your ROE. You have also explained the reasons for the slightly higher cost-income ratio. Then I think the third component is revised expectations in terms of provision releases for this year. Can you please comment on this? I found it interesting to see this inflection point in your net interest margin. The question is whether, assuming that deposit pricing remains tight, would you still see some upside in terms of your net interest margin coming from the volume effects?
In this context, maybe you can also tell us where you are in terms of asset repricing. That would be helpful. Thank you.
Mr. Papst, thank you for your question. Let me take your first question on the provisions. As explained, the provisions relate to a sub-portfolio of exposures in project finance, or mainly relate to a sub-portfolio of exposures in project finance for renewable energy projects in our Southeastern European segments, and they are mainly related to delays in construction and connection in individual cases. In fact, these are very isolated exposures, and that does not mean anything for our broader portfolio. We do also not expect any similar deterioration in the course of the fourth quarter for similar exposures. Therefore, we had to adjust our capital markets guidance on return equity in the third quarter.
The reasons are that, number one, we had to build additional loan loss provisions due to the deterioration of these specific cases, and we also had to adjust, as you indicated, our assessment of potential loan loss releases in the fourth quarter. We had the expectation that we might release provisions on specific cases in the fourth quarter, where we now do expect that they are more likely to materialize not earlier than 2026. The combination of both made us revise the ROE guidance downwards. Does that sufficiently answer your question?
Yes. Sorry. Can you just confirm what are the loan loss provisions you expect to be delayed in 2026? Sorry, I didn't get that.
Well, we expected some of these provisions to be released in the fourth quarter, and we do not expect that now any longer in the fourth quarter, but we expect loan loss provisions to be released not earlier than 2026. For the fourth quarter, as indicated, other than in the ordinary business, we do not expect any material loan loss provisions to materialize.
Okay. Thank you. That's clear. Mm-hmm.
Then, a s mine- Apologies. I think Milosz still had one question on the net interest margin. Let me quickly address this. Milosz, you pointed out the inflection point in net interest margin. Indeed, this is the second consecutive increase both in net interest income, also net interest margin expanding sequentially now by six basis points compared to quarter two, and before that also compared to quarter one. This increase, of course, largely driven really by volume effects. If we were to look at the topic of pricing, we would see broad stability. It's driven really from the income side, right. We have EUR 4.5 million in interest income and EUR 1.3 million increase in interest expenses. This is what is driving this, and it's a very granular development across markets. This pricing stability obviously also highlighted by the fact that policy rates have remained broadly stable.
ECB rate is at around 2% since May or June. This has obviously helped being finally able to realize these volume-driven increases. Shall we continue, Milosz, or is there a follow-up?
In terms of the likelihood of an expansion in margin, assuming that the deposit pricing remains tight-
Yeah.
Even if you increase the sight deposits.
Yeah.
Does the downward asset repricing cycle gradually come to an end, and then does this give you some potential upside in terms of the margin in the next coming quarters?
The downward repricing is certainly now fully priced in. We don't see significant pricing effects. The likelihood of expansion of the net interest margin is, of course, built into the strategy, right? By growing granularly on the asset side, smaller tickets, the micro segment, the retail segment with higher weighted average interest rates in both these segments should support at least stable, if not growing, weighted average interest rate on the asset side. Obviously, we're working against the broader trend of shrinking margins, and probably more importantly on the refinancing side is where we still see the biggest gap compared to market. We are just beginning to position ourselves in the retail segment. As I mentioned, we are making progress, but increasing the share of sight deposit in our total deposit mix will continue to reduce refinancing costs and support higher net interest margins.
The likelihood of expanding net interest margin, I would say yes, it is built into the strategy. It should be the result o f our strategic initiatives, whether this will then always happen in the short term, one to one, there's always short-term effects that might sway the dynamic or the trend in one way or the other. In the long run, we are expecting margins to be strengthening by the measures that we're taking.
Okay, perfect. Thank you.
Our next question comes from Knud Hinkel with Pareto Securities. Please go ahead.
Yeah, good afternoon. Thanks for having me. One question on the cost-income ratio and the higher risk provisioning. That came in parallel as you sent out the news release in October. My question would be, are these two then completely unrelated, or is there a link between the two of them? Secondly, my observation is as you guide for 72% for the entire year and the nine months figure is clearly below 72%, what do you expect for the final quarter on cost development, or what is driving the cost-income ratio in the final quarter? Also I would like you, and that's my third question, maybe you can already give a bit of color for the next year, what do you expect as cost-income ratio, at least in the first one or two quarters? That would be my third question.
Last but not least, let me wish all the best, Mr. Spechtenhauser, for your time after ProCredit. Thank you for having all of these discussions with us. Thank you very much.
Well, Mr. Hinkel, thank you very much for your kind remark. I really appreciate it. It means a lot to me. Let me take the first of your question on cost-income ratio and risk, and whether they appeared in parallel and how they affected our reduction in the guidance. Let me start with the second quarter of this year. In the second quarter, we already showed a return on equity of 9%. Based on the assumption that we would have continued low cost of risk for the second half of the year, we continued to stick to our guidance of approximately 10%.
The fact that we are anyhow already at the end of the second quarter at the lower end of our guidance of approximately 10% was mainly due to the development in net interest income, as Christian explained, where we saw mainly higher than expected refinancing costs due to very sticky rates on deposits. That was an effect which we saw anyhow, and only due to the assumption of continued low cost of risk. For the remainder of the year, we decided to stick to our guidance of approximately or around 10%.
What happened in the third quarter is that we saw this increased provisioning of EUR 16 million-something for cost of risk, which then led us to not be able to continue to stick to this assumption of continued low cost of risk, because at the end of the third quarter, we were at a cost of risk of 31 basis points, which was slightly higher or higher than what we expected. Even if we don't expect material cost of risk to, besides ordinary course of business, to materialize in the fourth quarter, we now had to lower our overall assumption for the return on equity for the entire year. That's the whole story.
Okay. Thank you very much.
As a reminder, if you wish to register for a question, you may press star and one. Ladies and gentlemen, it looks like we have no more registrations for questions, so I would like now to turn the conference back over to Mr. Spechtenhauser for any closing remarks. Sir?
Thank you, and thank you all for your interest in and your participation in today's results call. We hope we have given you as much transparency as possible. If you have any additional questions, please do not hesitate to contact Nadine in Investor Relations. Eriola and Christian look forward to speaking with you when we publish our full-year report on March 19th. Let me take this moment to express my sincere appreciation for the constructive dialogue and engagement over the years with shareholders, analysts, and other people who regularly attend our results call. It has been a privilege to work with you and to represent ProCredit Group in these discussions. I wish the Group, our shareholders, and all of you continued success. Thank you so much.