Warm welcome to everybody on this call on the half year and quarter two results of 2025 for the ProCredit group. My name is Hubert Spechtenhauser. I'm the Chairman of the Management Board. As always, I'm 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, give 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 have the usual structure to today's presentation. I will take you through the sections covering the highlights of this first half year, while Christian will take you through the details of our financial results, risk, and asset quality indicators.
When we presented our updated business strategy at the Capital Markets Day in March 2024, we identified 2024 and 2025 as critical transition years for laying the groundwork for our ambitious new vision. These years are essential not only for switching the business dynamics on the ground to deliver strong and continuous growth and transformation, but also for implementing key investments in staff, branches, IT, and marketing, ensuring a long-term, scalable, and sustainable foundation, all while maintaining robust levels of profitability in the meantime. Following a successful 2024, we continued to make strong, balanced progress in the first half of 2025. Our loan portfolio grew dynamically, supported by favorable market conditions and strong momentum across our banking operations. Adjusted for foreign exchange effects, total loan volume increased by a robust 7.2% in the first six months across all markets in Eastern and Southeastern Europe.
This includes a newly resumed growth dynamic in Ukraine. Our focus remains on micro, small, and retail segments, which offer higher diversification, stronger margins, and an optimized risk-weighted asset structure. Like last year, these segments accounted again for about 70% of our top-line growth. Profitability remains on a good level of 9% return on equity, which is slightly below, but broadly in line with our guidance for the year. Since mid-2024, we have faced margin pressure due to declining ECB and local policy rates, leading to asset repricing, in particular relating to our placements with central banks. Deposit rates, however, remain relatively sticky, partly due to ongoing geopolitical uncertainty affecting liquidity across our markets. Offsetting these pressures, we benefit from strong fee income, a stabilized cost base, thanks to the fact that costs related to strategic investments are now largely absorbed, and a continued low cost of risk.
The difficult market conditions in Ecuador still represent major headwinds for the group, and the bank contributed again negatively to the group results. Without that contribution, the group's return on equity would stand at 10%. In Ukraine, it is worth mentioning that following the signing of an investment guarantee with the Federal Republic of Germany in December 2024, covering EUR 20 million of equity in our Ukrainian subsidiary, we are now able to, and are, expanding our Ukrainian operations without increasing downside risk at the group level. Slide three is rather complementary to the summary I just provided. We see the pronounced foreign exchange effects on our balance sheet growth, the good net result amid strong portfolio quality and low cost of risk, and at this time, a still elevated cost-income ratio.
Our capital base remains solid with a CET1 ratio of 13.1% as partial profit attribution, net of dividend accrual and other deductions compensated for the risk-weighted assets increase that resulted from the strong business expansion. This slide shows the execution of our strategy in a different light. The progress made since the inception of the new strategy in early 2024. In the last 18 months, we achieved a substantial loan growth with our smaller volume segments of 30%, a key development in the long-term transformation of our balance sheet. We also grew in a balanced and regionally diversified way, laying particular focus on attaining critical size in markets where our footprint has historically been comparatively small. In Albania, Bosnia, Georgia, Moldova, and Romania, we grew on average by 22% in 18 months. The FX-adjusted figure would be even higher.
The granularity we are targeting on the lending side is mirrored in our approach to deposits. We are gradually enhancing the positioning of ProCredit as an attractive bank 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 past 18 months, we have added more than 30,000 retail clients, leading to a 26% 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 support strong MSME lending growth, but also contribute to structurally lowering our refinancing costs. All in all, we are highly satisfied with the path and dynamic of our structural transformation, and are confident that over time, it will translate in visible P&L performance effects.
We are seeing strong, broad-based expansion of our lending business across our map, with strong growth rates in half year one of around 7%-10% in most markets, adjusted by currency effects. This is supported by robust GDP growth across our region, significantly outpacing that of the euro area, combined with low banking sector penetration and the increasing geopolitical and macroeconomic relevance of our markets. Our SME clients are showing increased appetite for investments in spite of the broader geopolitical uncertainty, specifically related to how tariffs are going to impact the global economy in the years to come. Domestic demand is also increasing sharply in the region, fueled by rising wages, increased public and private investment, and easing inflation. A standout development is our performance in Ukraine. Adjusted for foreign exchange effects, we grew 13% in Ukraine, also attracting new clients in an otherwise still restricted lending environment.
This exemplifies the strategic value of our partnerships with governments and supranational institutions that share our vision of combining sustainable business growth with positive impact. In 2024, we made substantial progress in recruitment and branch network modernization. As a result, we see broadly stable headcount in 2025, with only marginal additions to our branch footprint. Ongoing IT investments, primarily reflected in higher operational costs at our software company, Quipu, are propelling several key initiatives, such as digital onboarding on retail clients, enhanced E&M banking platforms, installment-based credit card offerings, and improved customer relationship management systems. We are also preparing to be among the first movers in our markets with the integration of SEPA, Apple Pay, and Google Pay. These developments aim to enable us to serve larger numbers of retail clients efficiently by offering a modern, comprehensive product suite.
While most of these innovations will be launched over the coming quarters, for instance, our new mobile banking platform went live in Kosovo last month and will be rolled out gradually to the other markets in the following months. The associated upfront investments have already been largely absorbed. Finally, we have deliberately slowed the path of marketing spend, shifting towards more targeted campaigns that promote new products and functionalities. Recognizing that strategic investments take time to yield measurable results, we expect these growth catalysts to begin contributing to the already good business momentum more meaningfully over time. As for our outlook for 2025, we confirm our targets for the loan growth of around 12%, a return on equity of around 10%, and a CET1 ratio of around 13%.
On loan growth, our outlook is now based on the growth adjusted for currency effects, as we effectively have seen a significant level of currency movements this year so far. It is worth noting, though, that the risk factors to our guidance have indeed heightened somewhat given the increased macroeconomic uncertainty. With regards to cost-income ratio, we updated our expectation for this year to around 70%, reflecting the effects from the repricing of short-term assets, in particular, our deposits with central banks, and at the same time, market interest rates being sticky on customer deposits. Overall, we see the group well on track for this year, delivering on the financial metrics on the one side, whilst making strong progress on the strategic initiatives and our growth and transformation strategy on the other side.
With the execution of key strategic priorities well on track, from igniting a good growth and transformation dynamic in all our banks, to moving forward and completing strategic investment initiatives, to establishing a notable presence in the retail sector of our markets. We remain self-assured in our path and optimistic about achieving our medium-term ambitions. We plan to grow our loan portfolio to a volume of above EUR 10 billion, which will allow us to realize important scaling effects and bring the cost-income ratio to a level of approximately 57%. Our return on equity ambition of around 13%-14% does not include any upside potential from broader reconstruction efforts in Ukraine, which would allow us to engage and grow boldly in a market which has historically provided very attractive returns.
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. Needless to say, throughout our ambitious growth path for the upcoming years, we remain committed to our dividend policy. With that, I will now give the word to Christian, who will give you more details on the group results.
Yes. Thank you, Hubert, and good afternoon to everyone also from my side, and welcome to our presentation. I will keep the summary of our business development brief, as Hubert has already covered the key highlights. The top-line growth amounted to EUR 347 million, or 4.9%, was significantly impacted by the market appreciation of the euro against local currencies in the first half of the year. Adjusted for these foreign exchange effects, underlying growth was a strong 7.2%, representing just over half a billion euros. The continued execution of our strategic priorities is most evident in the rising share of smaller volume segments within the total loan portfolio. This share has increased by approximately four percentage points since the launch of our revised strategy 18 months ago, and continues to trend upward towards our target level of around 50%.
Similarly, on the deposit side, our strategic progress is clearly reflected in the growing share of retail deposits within our overall deposit base. This share has increased by two percentage points year-to-date and by four percentage points since the beginning of 2024. While new retail deposits remain predominantly in the form of term deposits, a reflection of prevailing market conditions despite falling policy rates, this is consistent with the broader market conditions in our region.
Elevated investment appetite, shaped by ongoing geopolitical uncertainty and persistent inflation concerns, has led to tighter liquidity and prompted more aggressive deposit gathering strategies by many banks in the market. FX effects also influenced the headline deposit figures. The year-to-date reduction of EUR 72 million masks an underlying increase of approximately EUR 120 million, or 1.5%. This growth was driven almost entirely by retail deposits, while business deposits declined modestly in line with typical seasonal patterns.
Let's move to the P&L. Operating income as of June 25 was at EUR 213 million, a EUR 6.6 million decline with respect to the previous year. Net interest income reduced by around EUR 9 million, mainly due to the dynamics of receding policy rates, which began setting in sometime in quarter two last year. These dynamics have slowed down in the recent months, but income from central banks and other shorter investments have decreased as a consequence by more than EUR 13 million year-on-year. Net fee income, on the other hand, increased by a good EUR 2.7 million. The cost-income ratio stands at an elevated level of 70.9%, mainly due to the comprehensive investment initiatives from last year. It is worth highlighting that we now see the cost increases from those strategic investments as largely absorbed. Let's turn to net interest income.
Quarter-on-quarter, net interest income increased by EUR 1.4 million, with the net interest margin also expanding by around six basis points. While these trends are naturally encouraging, we view them cautiously, as they are partially influenced by calendar effects and reduction of excess liquidity earlier in the year. Nonetheless, the data supports our observation. Market deposit rates have broadly stabilized, and the pace of negative repricing is clearly slowing down. Year-on-year, net interest income has reduced, mostly due to the marked reduction of income from cash and cash equivalents driven by lower policy rates. This has only been partially offset by the positive volume effects from our strong business growth. Conversely, deposit rates rose throughout 2024 as they adjusted to the higher interest rate environment, albeit with a time lag. They have since stabilized at relatively elevated levels.
In addition, interest expenses in H1 2025 were higher due to the issue of subordinated green bonds in April 2024. Overall, our income from cash and cash equivalents dropped by EUR 13.4 million due to the repricing effect, while income from loans to customers increased by EUR 11.1 million, wherein the strong volume effects outweighed the partial repricing of loans in some of our markets. Looking forward, we are confident that our granular loan and deposit growth and transformation strategy, as Hubert has highlighted earlier, will structurally support net interest margin. Quickly on fee income. I explained it last quarter, but let me repeat one last time.
We realigned our chart of accounts and now show the income from FX transactions, which basically are payment services to clients in fee income and reserved from FX revaluation in the other operating income. The amount of previous periods have been restated according to this new logic. Quarter two net fee income was 8.4% above the previous quarter. Quarter one is always seasonally weaker due to lower economic activity immediately after the holiday season. Beyond that, the quarter-on-quarter dynamic is achieved through all major sources of income. Year-on-year, we also see a 6.2% increase, driven above all by our payment and FX business, while our income from cards reduced due to an increase of provider fees, which we mentioned in earlier calls. Overall, the positive dynamics in our fee business are a reflection of our growing client base, both in MSME and retail, which drive number and volume of transactions.
Moving on to personnel and administrative expenses. Personnel expenses are more or less on quarter one level, reflecting the stable headcount since the beginning of the year, reaffirming what Hubert said earlier. Strategic investments in staff are essentially completed. Administrative expenses are slightly higher than in quarter one, mainly related to one-time consulting costs that were fully expensed in quarter two. We see stable dynamics in all major expense items. Year-on-year, the increase in personnel and admin expenses is more marked at around EUR 10.4 million, but corresponds almost entirely to strategic investments undertaken in 2024, as the associated costs of these investments are only to a limited extent reflected in the half year 2024 numbers. These investments of last year include an expansion of staff of more than 700 people and the opening of 47 branches and service points. Loss allowances continue on overall lower levels.
In quarter two, we recorded EUR 1.1 million in provisioning expenses, corresponding to an annualized cost of risk of just about six basis points and bringing the year-to-date figure to EUR 300,000. Good portfolio quality and systematically high recoveries from written-off loans are the major catalyst for these continued benign cost of risk. Our loss allowance on the balance sheet remained largely stable, with management overlays representing close to EUR 60 million, or 1/3 of total provisions. The share of defaulted loans has remained broadly stable at 2.1% since the beginning of the year, with no material credit risk events observed. With the exception of Ecuador, credit quality remains solid and consistent across geographies and sectors, including agriculture, where last year we had observed some drought-related deterioration. As new U.S. tariffs begin to take a more permanent form, the broad implications for the global economy remain uncertain.
However, we currently do not anticipate any significant first-round impact on our client base, given that the U.S. is not a major export destination for most of our markets, with the exception of Ecuador, which, however, is unlikely to suffer from a relative disadvantage from these tariffs. Following a preliminary portfolio review, we have, across the group, proactively reclassified EUR 72.6 million in exposures to clients considered more sensitive to U.S. tariffs into Stage Two. We will continue monitoring these clients more closely, but expect, at this point, no deterioration of credit quality in these exposures. Looking further ahead, it remains to be seen how the global economy will adjust to the newly emerging trade environment. For now, we observe a somewhat heightened investment appetite, both in fixed and working capital assets, which in part serves as a hedge against expected inflation. Let's look at segment performance.
We see well-performing geographic segments in Southeastern and Eastern Europe, with good loan growth in the case of Eastern Europe, adjusted by FX effects, and annualized ROEs of around 13%-15%, and a cost-income ratio of around 60%. The contribution of group functions was more negative than last year by an amount of EUR 4.2 million, which reflects above all the investments in the group's IT company, Quipu, as well as the strengthening support functions on the level of ProCredit Holding. This includes the establishment of centralized teams for business development. Higher interest rates from the Green T2 bonds issued in April last year are also borne by this segment. Ecuador contributed negatively to the group result by around EUR 5.4 million. Though the underlying dynamics on earnings, business development, and liquidity are overall positive, the entity continues to negatively affect the consolidated result.
Without the contribution of PCB Ecuador, the ROE would stand at 10.0% and the cost-income ratio at 67.9%. Finally, this last slide shows the regulatory capital position. As of June 30, our CET1 ratio stands at a solid level of 13.1%, well above the regulatory requirement of 9.9%. In half year one, RWAs increased mainly in the form of loans to customers, while RWAs in the form of exposures to central banks came down from the high year-end level due to the seasonal reduction of excess liquidity. Our core capital increased by EUR 19 million with respect to the end of last year, mostly due to the attribution of H2 2024 and H1 2025 results, net of 1/3 of dividend accrual and other temporary deductions. With this, let me conclude our presentation for today. Hubert and I 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 have a couple of questions related to your balance sheet and the refinancing side. When we look at your deposit growth in the first half of the year on an FX-adjusted basis, it was 1.5%. Of course, in absolute terms, it reflects seasonal factors, especially in Q1. I think the growth rate's slightly below the average growth in the first half of the year in previous years. I wonder whether this is just some short-term fluctuations, or there are any particular reasons like increased competition for deposits, maybe the fact that you don't run any major marketing campaigns now, or is it just because of the broad uncertainty across the globe?
At the last AGM, your shareholders authorized you to issue profit participation rights, so Genussrechte, up to EUR 200 million. Are you able to give us some indication on the potential timing of the issue at this stage? Would it be this or next year, or is it too early to discuss this? Maybe more broadly tied to the slower growth in deposits, I've also seen that you've issued EUR 100 million of debt securities. In this context, can you talk us through your strategy in terms of your balance sheet management? Thank you.
Thank you, Milosz. Let me begin and see if Hubert has anything to add. Starting on the deposits, indeed, in this year, even the FX-adjusted growth of around EUR 120 million is a bit below the dynamics that we've seen in previous years. First half-year results on deposits are typically subject to seasonality effects. These are dominant primarily in quarter four, where significant liquidity comes into the accounts of our business clients, and that liquidity is then typically reduced in the course of the following six months. Admittedly, in this year, this dynamic was a bit more pronounced in the first half year. We're talking about accounts from legal entities, specifically businesses, not so much retail. Retail has been very steady, and essentially all the increase that we achieved came from retail.
On the business account side, one can only assume that the broader geopolitical dynamics related to tariffs and the broader uncertainty that is triggered by the discussions on tariffs have led to some more increased investment appetite from many businesses. Many have bought working capital. Many have invested also more long-term. All of that could be a means of hedging against expectations of future inflation, which might be a result of these tariffs. At this point, we don't know. What we can say for sure is that these investments ultimately would come in a type of cycle that sort of if you invest in working capital, this money will come back eventually. This is the observation that we've made in previous years, that half year two is particularly strong on deposits and the same expectation we have for this year.
On the profit participation side, indeed, this was on the agenda of our AGM and has been fully endorsed by our shareholders. Ultimately, this is just one additional tool in our capital management toolkit that is very good to have. At this point, we have no indication or also no clear plans of when to issue such instruments. Ultimately, the last question was on the debt securities. The debt securities, in the first instance, are not necessarily a reflection of our deposit-taking business. Debt securities are issued by ProCredit Holding in Frankfurt, where the holding does not have any deposit business. These issuance are rather a tool of liquidity management by the holding company as the holding company has regular repayments, regular transactions with its banks. Essentially, with this transaction, we replaced other repayments in the form of debt securities from previous months and quarters.
Excellent. Thank you very much.
Thank you.
As a reminder, if you wish to raise the follow-up question, you may press star and one. Our next question comes from Hikel Claude with Pareto Securities. Please go ahead.
Good afternoon. Thanks for having me. I have three questions, if I may. First of all, I've seen that you're in the regions that you have a negative interest result Germany. Is that because of the factors you just mentioned? Because of the headquarters that is located in Germany, that you have some functions there which don't have in other regions, that you have a negative interest result in the region? Secondly, you merely described the recent development in Ecuador. Are there any news on the strategic level that you can share with us on Ecuador? That would be helpful. A more general question at the end. You are now at the cost-income ratio of slightly above 70%. The goal is to get to 57% in a couple of years for the midterm.
Assuming that costs will not stand still in the next years, but grow with inflation rate, let's say 3% or so, that means that income must increase by low double-digit numbers for a couple of years in a row. What makes you confident that this is possible, given the little bit sluggish growth in the first half of the year? Thank you very much.
Let me start with the question regarding cost-income ratio. Indeed, we plan to reduce our cost-income ratio in the course of the next year to 57%. It is mainly a function of income growing more strongly than cost. As Christian said before, the substantial increase in our cost base due to the strategic investments in our staff, in our branch network modernization, in IT, and in marketing, which we indicated last year to set a foundation for a growth and transformation strategy, have been largely absorbed. We do now expect to continue to grow strongly. As you might recall, we grew with more than 12% last year.
Our loan book, we also grew this year in the first half of the year, FX adjusted to 7.2%. We guide for a growth rate of 12% for the full year, and we do not intend to slow down in this growth ambition. We aim to be north of EUR 10 billion in loans to customers in the medium term. That's one element. The second element beside growth is the transformation of our balance sheet. As we explained in our capital markets day and continue to explain, we want to have a more granular balance sheet on both sides, i.e., in loans, by focusing very strongly on the so-called lower volume segments, i.e., private individuals, micro clients, and small enterprises. They accounted last year and this year for more than 70% of our growth.
They typically come with higher margins, with a better utilization of the risk-weighted assets, also with a higher reciprocity. We do the same on the liability side by also focusing on more granular growth and by increasing the contribution of retail clients. Retail clients do, on average, provide a way less expensive deposit base. Therefore, by doing these two things, number 1, growing at the path which we are growing at right now, and by transforming our balance sheet and therefore structurally supporting the margin development, we are confident that over time we will reach this 57%.
Let me take the question on Ecuador and the German segment. Beginning with the German segment, indeed, the negative interest result in Germany is a result that we have the holding company, which obviously does not have any customer lending business. It does lending to subsidiaries to a limited extent, but has a broader liability side with a lot of debt securities that were issued on the capital market that is driving essentially the negative net interest income. That includes, obviously, also subordinated debt, which is the most expensive instrument on the German segment balance sheet, if you like. On Ecuador, indeed, one can say this has been the biggest disappointment in this first half-year. The relatively high loss of EUR 5.4 million, which is broadly in line with the dynamics from last year. It is a combination of adverse developments.
There is continued operating income reductions each quarter, due to very low and still capped lending rates in Ecuador. Refinancing rates driven by high US dollar rates, resulting obviously in a natural margin pressure, also the need to keep very high liquidity buffers, that have no or close to no yield, given the precarious liquidity situation in the market. I should say, though, that there is a light at the end of the tunnel on both these fronts. Market rates for deposits have come down, meaning that refinancing will become cheaper, going forward, although the repricing effect will naturally take time to trickle its way through the system. Also the liquidity situation in the market has improved, also with some support from the IMF, meaning also that the excess liquidity in Ecuador can be optimized going forward.
It remains a very challenging market environment, clearly. We are actively steering against a difficult situation. This remains the priority, turning the bank around. I know what you are alluding to when you talk about strategic options. There is nothing new to report. Indeed, the priority is to turn the bank around before talking about anything else.
Okay. Thank you very much.
I have a follow-up question from Milosz Papst. Please go ahead.
Yes. Thank you. I have two follow-up questions. One is related to the average interest rate on your loan book across client segments. When you announced your updated strategy, you've given us some indication in terms of the average interest rate across medium-sized clients, small clients, micro clients. I just wonder whether, based on what you've seen recently, in terms of what you've seen across your loan book, is broadly in line with what you've indicated back then. That would be my first question. Secondly, do you see any indications that there might be, again, a special banking tax in Ukraine introduced similar to last year, or are there no indications at this stage? Thank you.
Thank you, Milosz. Yeah, good questions on the average interest rates. Indeed, we have seen the average income on loans decrease, in fact, with respect to 2023 data, which was the point in time based on which we did the analysis for the Capital Markets Day. The reason is clear. It's a significant reduction in policy rates. Around 65%, 70% of our loan portfolio is variable, so there has been a repricing across the market for loans. The margins are broadly stable across these segments. What we manifested in the Capital Markets Day about the approximate one percentage point difference as you go down segment by client segment in the margin, that still holds true today. Your second question was on the Ukraine tax year.
At this point, there is no indication whatsoever from any officials from the Ukrainian government that we could recycle into giving you more insight. There's no indication that this tax will be implemented this year.
Okay. Yeah. Thank you. Obviously, I meant the margins, the difference in margin across the different client segments, rather than the absolute interest rate.
Yeah.
Sorry for not being clear on that. Yeah, this was exactly what I wanted to ask about. Thank you.
Thank you, Milosz.
Ladies and gentlemen, this was our last question. I hand back over to Mr. Spechtenhauser for any closing remarks.
Thank you all for your interest and participation in our results call. We hope to have given you as much transparency as possible. If you have any additional questions, please do not hesitate to contact Nadine. The next scheduled conference call will take place when we publish our quarter 3 2025 results on November 13th. Thank you once again for your participation