Ladies and gentlemen, welcome to the ProCredit Holding AG Q1 2025 results conference call. I am George, the conference call operator. I would like to remind you that all participants will be listen only mode, and the conference is being recorded. The replay of the conference will be published on the ProCredit Holding website in the investor relations section. The presentation will be followed by Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Hubert Spechtenhauser. Please go ahead.
A warm welcome to everybody on this call on the quarter one results of 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, 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 call. I will take you through the sections covering the highlights of the first quarter, while Christian will take you through the details of our financial results, risk, and asset quality indicators.
The financial year 2024, the first year of our updated business strategy, was all about executing on the strategic growth priorities that is strong but granular top-line growth on both sides of the balance sheet. Moving forward, our strategic investments in staff, IT, marketing, and our branches. The sixth, we aim to create a sustainable foundation for the ambitious scaling of our operations. In that year, we achieved the highest ever growth in loans and deposits of our company history, succeeded in expanding our staff base by an impressive 19%, and accelerating the development of our future retail banking infrastructure. In 2025, we continue on our growth and transformation strategy and finalize our strategic investments so that scaling effects can start materializing. In that sense, quarter one is showing exactly those early signs we were aiming for.
Good loan growth, again, achieved primarily in the smaller volume segments, micro, small, and private individuals. At the same time, we see that the underlying strategic investments in growth catalysts that have been driving our cost base in the past two years are starting to level out. Our group financial result continues to be solid. Return on equity is at a good level of 9.5% in spite of headwinds from lower interest rates and a continued underperformance of our Ecuadorian subsidiary. Overall, we are well on track on delivering on our growth initiatives by being in a good position to achieve attractive returns even before meaningful scaling effects materialize. On that note, we have proposed to the AGM on June fourth, a dividend payout in line with our dividend policy of EUR 0.59 for the fiscal year 2024 results.
Finally, let me elaborate shortly on our last week's promotion to the German SDAX index for small caps. Since our listing in 2016, we have consistently aligned the group also with capital market requirements through the conversion of our legal firm into that of an AG two years ago, also through many other things. We thus take the inclusion in the index as a very strong sign of recognition for what we are doing and an important milestone for our banking group that further enhances our visibility at the capital markets and ultimately also the attractiveness of our share. This slide shows the highlights of this first quarter.
Loan growth has been good at around 2.5% in spite of some negative currency effects from this evaluation of the U.S. dollar, without which the growth was a strong 3.2% or EUR 220 million. Deposits slightly reduced, mostly due to seasonal effects. Nonetheless, deposits from private individuals showed continued growth in line with our strategic priorities. Continued strong credit risk characteristics with a share of default of 2.2% inter alia contributed to the good net result of EUR 25.2 million, which corresponds to a return equity of 9.5%. Excluding the regional segment South America, i.e., our bank in Ecuador, the group return equity in quarter one amounted to 10.4%. Lastly, CET1 ratio continues to be at a solid level of 13.1%.
Slide four shows that we are continuing to deliver on the strategic priorities presented to the capital market in early 2024. Our balance sheet transformation continues as we grow primarily in smaller volume segments. More than 70% of the total growth came from these segments, bringing us closer to our target of a share of smaller volume tickets in total loans of more than 50%. Our smaller banks, for which we see particularly good scaling potential, grew more strongly than the group in average, by 3.4% in quarter one, adjusted for FX effects. On the liability side, we are making further progress on achieving our transformation goals. With a good growth of private individual deposits of 2.2%, we are also steadily moving towards our 50% target of share of deposits from private individuals in total deposits.
As I mentioned earlier, the underlying dynamics of our strategic investments are slowing down, as we are seeking to complete the bulk of our strategic initiatives by the end of the year. In quarter one, our staff numbers grew by a moderate 19 employees or close to 0%, compared to increases of 19% last year. Similarly, branches and service points together increased by only two in quarter one , compared to an increase by 47 last year. In IT, though, we continue to see some increases this year, mostly in terms of external IT costs. However, all in all, considering also our internal resources at Quipu, which obviously make up the majority of total IT expenses, this investment area is also slowing down visibly relative to last year. Let's have a look at the macroeconomics of our countries.
It is clear that the world is going through a period of pronounced economic uncertainty, triggered by frequently changing trade and foreign policies of the current U.S. administration. Tariffs on U.S. imports are a prominent example of these seemingly erratic behaviors and have triggered a downward revision of world GDP growth in the books of many economists. Also, for our countries, the new trade paradigm has resulted in reduced GDP growth assumptions, assuming the tariffs are here to stay. However, in light of such headwind, economic growth in our region is still expected at positive rates of around 3% this year or 3.5% in the medium term, while Western economies are more likely to stagnate or in some cases even shrink. At this point, we do not expect any meaningful, immediate first-round effects of tariffs on our clients.
The U.S. market typically makes less than 5% of our country's exports, many of which are services which are, at least at this point, exempted from the tariffs. Only Ecuador is exposed in a more meaningful way, as more than 25% of the country's exports are to the United States. However, the tariff rate on Ecuador is at a comparatively low rate of 10%. The first round of tariffs on our countries range between 10% for Albania, Ecuador, Kosovo, Georgia, and Ukraine, to above 30% for Serbia, Bosnia, North Macedonia, and Moldova. During the 90-day tariff pause, a rate of 10% applies to all our countries of operation. In general, though, it is a rather complex macroeconomic situation, and we, of course, continuously assess any potential impact on clients, including second-round effects.
Our outlook for 2025 has not changed since the beginning of the year, though the risk factors have indeed heightened somewhat given the increased macroeconomic uncertainty. As a group, we, of course, remain focused on delivering on our strategic priorities in these terms. We are pleased that besides the strong continued execution of our growth and transformation strategy, we could also maintain a good level of profitability this quarter in line with our expectations. Against the background of continued headwind on margins from generally declining interest rates, and given that scale benefits are to become visible only over the next quarter, we very much feel reassured that the strategic direction the group has taken is effectively maintaining an attractive profitability.
For 2025, although it is early to say at this juncture after only quarter one into the year, we see the group well on track in terms of the financial outlook presented in March. Similarly, we remain firmly on track of our medium-term targets. We believe that we have made very good progress on our strategy since its rollout last year. We plan to grow our loan portfolio to a volume of 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 also allow us to re-engage and grow boldly in a market which has historically provided very attractive returns. Thanks to the investment guarantee provided by the Federal Republic of Germany in December 2024, we are already now growing our loan portfolio in Ukraine carefully. 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.
Thank you, Hubert. Good afternoon to everyone now also from my side, and welcome to our Quarter One presentation. Let me be brief on the summary of our business development, as Hubert already highlighted the main points. The top-line growth is strong and granular, 2.5% or EUR 174 million, dominated by smaller volume tickets to micro and small enterprises and private individuals. The aggregate share of the smaller volume segments consequently continues to grow and now stands three percentage points above the level since inception of our strategy. Already a visible and substantial portfolio shift that has increased by 0.7 percentage points in Quarter One alone. While admittedly, the outstanding loan volumes to private individuals and micro-enterprises remain low at this point in time, we continue to achieve strong growth rates of 8% and 10% respectively in these segments, underlining again that we are delivering strongly on our strategic priorities.
Our smaller banks in Southeastern and Eastern Europe with loan portfolios of less than EUR 500 million, achieved yet again a strong average growth rate of 3.4% adjusted for FX effects. That is around 4% in Moldova, Romania, and Bosnia, and 2%-3% in Albania and Georgia. As in every first quarter of the past years, deposits developed less dynamically than loans due to seasonality effects related to the economic cycle of our economies. Year-to-date, deposits reduced by EUR 55 million due to seasonal outflow from business accounts, as increased current accounts from SMEs at year-end, which often comes in the form of clearing accounts, selling inventory or receiving subsidies or grants, are typically used or invested in Quarter One and Quarter Two. That said, we are also managing the growth of term deposits cautiously this year to support margins in the short term.
As of now, even though policy rates are coming down, deposit rates remain high in many of our markets, putting pressure on our net interest margin. Let's move to the P&L. Operating income has reduced slightly by around EUR 1.6 million, mainly due to the reduction of net interest income of around EUR 5 million. We already mentioned it in our quarter four call. There is headwind from receding policy rates, which above all lead to a negative repricing of our excess liquidity held at central banks as well as short-term investments. Also, there has been some negative repricing of the loan portfolio in Quarter One in some of our markets. Net fee income, on the other hand, increased by a good EUR 1.5 million. The cost-income ratio stands at 70.8%, broadly what we expected at this point of the year.
In many ways, cost efficiency and profitability indicators are at an inflection point at this stage, at which interest rates are low but deposit rates remain high, at which operating expenses have increased, but scale is yet to be built, and at which technology has largely been developed but is not yet fully rolled out. In line with our guidance, we see underlying strategic investments starting to level out, which should lead to a decreased cost income over the next several quarters. Moving on to net interest income. As I mentioned, net interest income has reduced both quarter-on-quarter and year-on-year. Quarter-on-quarter, the main driver behind the 3% reduction is the days effect of 2 days less of interest accrual compared to Quarter Four. Moreover, there has been a more pronounced repricing effect of the Serbian and Macedonian loan portfolio due to lower policy rates.
Year-on-year, the strong asset volume growth has been more than compensated by liabilities volume growth and asset repricing. In particular, income from cash and cash equivalents reduced by more than EUR 6 million due to lower policy rates. Moreover, in Ukraine alone, interest income reduced by EUR 4.3 million, also due to lower interest income from customer loans as the policy rates almost halved within 12 months. These dynamics highlight again why we opted for the strategic path of increased scale and granularity in order to strengthen margins and to be able to generate strong earnings in times of lower interest rates. Very quickly on fee income.
First, let me explain that 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 result from FX revaluation, which is obviously a less meaningful amount in the other operating income. Amounts of previous periods have been restated accordingly. Quarter One net fee income was 7.3% below the previous quarter, as the number of transactions is always somewhat higher in Quarter Four and lower in Quarter One. The much more meaningful year-on-year comparison shows a good increase of EUR 1.5 million or 7.2% as income from payment services and income from FX transactions increased strongly. Income from cards decreased, on the other hand, slightly due to higher fees charged by card providers that we already mentioned in quarter four. Moving on to personnel and administrative expenses.
Personnel expenses are in fact down with respect to quarter four 2024, as the year-end has typically some extraordinary effects, such as provisions for untaken vacation. With respect to quarter three 2024, we see a moderate increase of around 2.5%, which is mainly due to the hirings done in quarter four 2024. Otherwise, we see a flattening out of this cost item as the underlying dynamic of building up staff has slowed down significantly. In quarter one, only 19 staff were added across all group entities. Admin expenses are also below quarter four 2024, again, due to seasonality effects, but also below quarter two and quarter three levels. This reflects a targeted reduction in our marketing expenses. That is, at least, until the retail infrastructure is fully rolled out, an increasing stabilization of IT expenses, and lower costs for external staff, which also has an important IT dimension.
Year-on-year, the increase in personnel and administrative expenses is EUR 8.6 million and mostly relates to the strong year-on-year increase in staff numbers and IT costs. Moving on. Loss allowances. They continue on an overall low level. In quarter one, we recorded a net release of around EUR 800,000 due to some improvements in stage two, as well as continued strong recoveries of written-off loans of EUR 2.9 million. The stock of loss allowances remained broadly steady since year-end, at around EUR 180 million. Management overlays also remained stable at around EUR 59 million. That corresponds to around 32% of total provisions. Model parameters have, as of now, not been recalibrated, also as macroeconomic forecasts still have a high degree of uncertainty due to the fast-changing foreign and trade policies of the new U.S. administration. In this regard, although the direct impact from U.S.
tariffs on our countries of operation is not meaningful at this stage, as Hubert has already mentioned, potential second-round effects might still affect the global economy as a whole, and thus also our markets, and therefore lead to some additional loss allowances on portfolio level going forward. On portfolio quality, we can also be brief. The share of defaulted loans remained broadly steady since the beginning of the year at 2.2%, as no meaningful credit risk events materialized. Looking at segment performance, we see well-performing geographic segments in Southeast and in Eastern Europe, with good loan growth. In the case of Eastern Europe, one has to adjust this by FX effects and annualized ROEs of around 13%-14% each, and cost-income ratios of around 60%.
The contribution of group functions was more negative than last year by an amount of EUR 2.2 million, which reflects 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. It also includes the cost of the green Tier two bond that was issued in April last year. Ecuador contributed negatively to the group result by around EUR 2.5 million. Even though the underlying dynamics on earnings, but also business development and liquidity, are overall positive at the bank, the entity continues to negatively affect the consolidated results. Without the contribution of PCB Ecuador, the ROE would stand at a 10.4% and the cost-income ratio at 68%. Finally, this is the last slide, we move on to regulatory capital position.
As of March 31st, our CT1 ratio stands at a solid level of 13.1%, as well above the regulatory requirement of 9.4% currently or 9.8% considering the increase in requirements announced earlier this year. In quarter one, RWAs increased mainly in the form of loans to customers, as the temporary increases in excess liquidity from quarter four reversed partially. Our core capital increased by EUR 19 million with respect to the end of last year, mostly due to the attribution of H2 2024 results, net of one-third of dividend accrual. Our quarter one result is not yet recognized to capital. This will be visible in quarter two together with the quarter two results. The CT1 ratio, including the Q1 result, amounts to 13.3% pro forma.
Needless to say that the capital ratios reflect the dividend proposal of EUR 0.59 for the FY 2024, which have been proposed to our AGM on June 4th. With this, let me conclude our presentation for today. We are now looking forward to taking your questions.
Our first question comes from Milosz Papst with Edison Group. Please go ahead.
Yes. Hi, thank you for the presentation. Firstly, congrats on the promotion to the SDAX. I have three questions, if I may. No. 1 is a bit lengthy. Apologies for that. You have reported quite good growth in net fee and commission income the first quarter, which was partly driven by the income from FX transactions, which you now report under fee and commission income. I believe that your net income from payment services, excluding FX transactions, was also quite healthy. I think it was up by around 10%, which is quite consistent with what you've seen in recent years. My question would be, is this due to volume effects? I also wondered if you expect a negative impact from fee increases of card providers to diminish in the coming quarters.
Are there any other limiting factors which would reduce growth in your total net fee and commission income in the near term below the growth in your income from payment services?
Thank you, Milosz. Let me take that immediately. Indeed, the major driver are our volume effects. As you know, last year, we were able to increase the number of our business clients. Those are the driving force really behind fee income by a substantial amount to more than 75,000. This is mainly driving this increase. Indeed, there were other mitigating effects. We have had actually a slight slowdown of transaction business. We know that SEPA is being rolled out in some of our markets, including Macedonia, Albania, and Moldova. This has already led to some downward pricing of transaction fees, which we will try to compensate by larger volume. On the diminishing effects on card transactions, indeed, this was a substantial increase last year that we are actively working on to limit already now and that we don't expect to repeat this year.
Okay. That's very helpful. Now, my second question would be, maybe you could give us some details of the steps you plan to take to increase your capital buffers, the CET1 and total capital level in light of the expected increase in regulatory requirements you communicated earlier this year. This would include any weighted asset density measures and any other measures you are currently working on.
Well, there are actively no concrete measures on which we're working on. There is obviously a broader toolkit of measures that you can always resort to, some of which have been proven also in the past. Currently, the buffers are above requirements. There are over three percentage points buffer in terms of CET1 that is overall comfortable and healthy. There's been a stable development in quarter one as the increase of the given by the attribution of H2 profits. Loan growth obviously continues to be the major driver. If you had to extrapolate, in this quarter, we had a negative of 30 basis points. If you had to extrapolate, of course, this is embedded in our strategy, if you like. Beyond that, we've had in quarter one other effects, a combination of the translation reserve deduction from USD depreciation.
We had a limited, but overall still a negative effect from Basel IV implementation, mainly driven by the retail exposures mismatch factor. Going forward, we will be very opportunistic, obviously, in designing capital measures. In the past, these included further guarantee programs on which we're actively negotiating at all times and rolling them out. We have MIGA as an important instrument to mitigate the RWA from exposures to central banks above all. We had a successful synthetic securitization in Bulgaria some two years ago that had a very substantial RWA effect. We see obviously potential in further diversifying our capital structure towards other instruments. You might have already read the invitation to our AGM. There is an agenda item that would grant us permission to issue AT1 instruments going forward.
Sounds like that's very helpful. My last question will be on your client traffic in the new branches and service points. I'm just wondering if the traffic will gradually ramp up, but I wonder if what you see already is broadly in line with what you expected.
Yes, indeed. We are, for the most part, very satisfied with the traffic in our new service points. We distinguish, as you know, between service points and branches. The service points are indeed designed to attract private individual clients. These are in very urban areas, very central, very visible. We're getting good traction there. The six branches that we opened last year, they have opened us up indeed to new geographic areas. That means shorter distances for BCAs to manage their business portfolios, attract new business clients. So far, this has worked out in essentially all cases.
Excellent. Thank you very much. That's all from me.
Thank you, Milosz.
Our next question comes from Marius Fuhrberg with Warburg Research. Please go ahead.
Yeah. Thanks for taking my questions. The first couple of questions regarding the net interest margin, net interest and income. What is your general expectation on the further interest rate development in your countries of operation? Which country had the most significant impact when it comes to lower interest margins? Lastly on this topic, maybe would you consider lowering your deposit to loan ratio in order to stabilize at least the volume effect and therefore the net interest margin as well? Another question on Ukraine. Is there any indication of further extraordinary profit tax, which we have seen in 2024? Is there something in the plans for 2025 as well?
Mr. Fuhrberg, thanks for your question. Let me take them, let me start with Ukraine. For Ukraine, we calculate currently with the existing officially communicated profit tax for banks. There has been up until now no indication of, again, increasing this profit tax, it has been done twice in the last two years. We very much follow the developments and try to understand as soon as there is any indication that it might repeat again. For the time being, as I said, we do calculate with the profit tax, which is the official profit tax of 25%. On the net interest margin, net interest income, we have seen a net interest income decrease quarter one versus quarter two. That is actually largely due to days effects in the first quarter.
As you have seen in the slide which Christian presented, you also saw that over the last four to five quarters, we saw a reduction of the net interest margin by give and take 10 basis points per quarter. We are now currently at 3.2%, which is close to 50 basis points lower than a year ago. We do see further pressure on decreasing rates, in particular in the euro area. We would expect that to level out in the course of the year. Please keep in mind that not all our markets are fully dependent on the ECB rate. Some of our markets, you see that they have decreased interest rates earlier, you have also potentially seen that they already started increasing them again. That applies in particular to Ukraine and Moldova.
If you ask where we saw, in absolute terms, the biggest decrease in interest income year-on-year, that was actually Ukraine, because there it decreased substantially earlier. The policy rate decreased earlier than in the Eurozone and very sharply. Over the last couple of months, it started to increase again. Coming to your last question on the interest rates, whether we are considering to lower deposit to loan ratios, not substantially. There is obviously an optimum to be found, and it is to be found country by country. The blended figure which you see at approximately 115% varies a little bit country by country. Broadly speaking, we think that's a healthy region. We would certainly not lower it across the board, potentially by a percentage point or two in individual countries.
Okay. That's clear. Thank you very much.
Our last question comes from Knut Henkel with Pareto Securities. Please go ahead.
Thank you very much for having me. I've got three questions, if I may. On the timing of your strategic investments, and the related cost-income ratio. My understanding so far was that you expected at the end of last year that the cost-income ratio might still go up quarterly. Now we've seen a decrease in the first quarter compared to last quarter. My question would be if it's just because you delayed further investments, e.g., in personal or marketing or IT, or are we already behind the peak of the cost-income ratio and respective investments? A little bit of timing considerations would be helpful. A follow-up question on the net income, net interest margin. My understanding so far was that you over the cycle so that the bottom very rarely goes below 3% in the past for ProCredit.
Do you expect this to be true also in this interest cycle, that this rate will not go below 3%, or do you see some risk that this time might be even lower than 3%? Third question, I just wanted to ask if there are potentially new developments regarding Ecuador that you can share with us. Thank you very much.
Well, thanks for your question. I would take the first and the third question and leave question two to Christian. Maybe to start with Ecuador, you specifically asked whether there is anything new to be reported. Actually not. It is exactly what we reported in our last call and already in the quarter four call. We continue to see a very difficult overall environment in Ecuador, which then translates in a also continued weak performance of the bank, and we continue to actively steer against this difficult situation. We have seen a small reduction on the portfolio, and we continue to transform the portfolio so that we are less impacted by the capped lending rates, which are imposed by the Ecuadorian central bank. Actually nothing to be reported beyond what we had reported already.
To your question about the strategic investments and how they impact our cost-income ratio and why you see this decrease in the cost-income ratio quarter-over-quarter. Actually, we had said when we communicated our capital market strategy in March 2024, that we were considering 2024 and 2025 to be transition years. Transition years we defined as us being willing to accept a slightly lower return on equity, slightly increased cost-income ratio due to these investments in what we defined as growth catalysts, i.e. personal IT, marketing, and selectively in our branch networks. As Christian explained, we have been executing on that in 2024. We have added, give and take, 730 additional staff, and we have added more than 40 branches and service points. That has already flattened out.
We have only added 19 new staff this year and only two service points, which is the smaller version of a branch. That is flattening out. Having said that, on IT, we still continue to invest this year. The fact that you see a reduction quarter-on-quarter is mainly due to the fact that quarter four is always somewhat distorted, because you see typically, at least in our case, but also in other banks, that quarter four tends to show a higher cost-income ratio due to one-off effect, which are only reflected in the fourth quarter. What we would expect this year over the four quarters to see a reduction in the second half of the year in the cost-income ratio, whilst there might still be a slight increase in the second quarter.
For the whole year, we would expect a cost-income ratio in the magnitude that we saw last year. Last year, we had 68.1%. Starting from 2026, we would really want to see a kicking in of the volume effects and also on the effects of our different balance sheet composition. Therefore, from 2026 onwards, we would hope to develop in the direction of our medium-term targets. To specifically answer your question, we have not delayed measures. It's actually the contrary. If we talk about staffing, we hired in 2024, colleagues which we expected only to hire in the first or potentially even the second quarter of 2025. We do see this as an achievement because our labor markets are tight, given also that immigration still continues to be an issue in our countries of operation.
Therefore, we were slightly ahead of plan, in particular in hiring people. All in all, we did not postpone or delay anything from our growth ambitions. What one has to keep in mind, that even if we have fully implemented what we intended to implement at this moment in time, there is a time gap between when you realize an investment and when it starts to yield. If you hire a person, it takes, in our case, typically a year till they become productive. Same applies to opening branches, same applies also to IT developments, which we have to a large degree done last year and now in the first quarter, and which are now being rolled out one bank after the other in the course of this year. Sorry for the lengthy answer, I hope it answers your question. Yes, very well.
Let me quickly go back to your second question. On the quote-unquote development, I think Hubert was already explicit on this in the earlier question. Also year-on-year, I think it's clear that a strong loan growth is at this point not yet able to compensate the really strong effect of the generally decreased policy rates across the map. The asset side is largely neutral in development year-on-year as the good loan growth broadly matches the negative asset pricing. On the liability side, we also have year-on-year driven by the strong deposit growth, which is fueling our business development, but is not yet generally decreasing deposit rates. In more detail, what are the effects is a repricing of cash and cash equivalents. This is what we mentioned.
This is really the major driver, Euribor, because the bulk of this cash reserve sits with the ProCredit Bank Germany, which places it at the Deutsche Bundesbank. Here's a repricing effect of EUR 6 million year-on-year. On the liability side, the other major factor is the green bond, which last year in the first quarter at least was not yet included, but is included now, which is about EUR 3.3 million in interest expenses. The other big driver is Ukraine, where interest income year-on-year is reduced by EUR 4.3 million. Again, major effect here. It's the local policy rate, which came down from a level north of 20% to what is today approximately half of that.
What's the takeaway of all of this is for us clearly that the strategic direction that we've taken in terms of growth and balance sheet transformation is exactly the right one. We need more scale. We need more granularity. We need to strengthen the margins by way of focusing also on higher margin tickets. This is what we're doing. On the refinancing side, we need to look at private individuals. We need to add numbers, and increase also thereby the share of sight deposits in our total deposits. This will come over time. Indeed, we have grown in private individuals largely through CDAs in the past. We hope that over time these CDAs will become cheaper and these CDAs will more and more migrate also into share, into sight deposits. Going forward, what is the expectation is obviously difficult to say.
Our 2025 outlook assumes a broadly stable NII level going forward. That means from quarter four, quarter one as a base. The volume effect on the asset side obviously expected to increase, and to increasingly also compensate the headwinds from margins. We will have still asset repricing in some of our markets, and that is obviously an assumption or depends a bit on the assumption that we take on policy rates. We would expect this assumption of stability also assuming that the policy rates will not significantly reduce any more going forward. Obviously, to close this point, the deposit rates remain obviously a factor. Our assumption at the beginning of the year was that deposit rates would come down eventually as policy rates also come down. At this point, we see in still some markets relatively high deposit rates.
Our expectation is that they will come down, and that will obviously help us also bring down refinancing costs.
Thank you very much.
Ladies and gentlemen, this was our last question.
Well thank you all for your interest and participation in our analyst 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 two 2025 results on August 14th. Thank you once again for your participation.
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