Ladies and gentlemen, welcome, and thank you for joining the ProCredit Holding Q2 2023 Results Conference Call. Throughout today's recorded call, all participants will be in listen-only mode. After the presentation, there will be an opportunity to ask questions. If you would like to ask a question, you may press star and one on your touch-tone telephone. Please press star key followed by zero for operator assistance. I would like now to turn the conference over to Hubert Spechtenhauser. Please go ahead, sir.
Welcome to everybody on this call on the half year one results 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 aim to spend some 40 minutes to cover today's presentation, which has been available since earlier today 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. With this, let us turn to slide one and outline today's call. I will cover the highlights before Christian addresses the financial performance and major risk indicators in more detail. I will then close the presentation with some remarks on our outlook.
In broad terms, quarter two has been a continuation of the very positive dynamics that we presented to you earlier in May during our Q1 call. Margins continue to develop positively and drive very competitive levels of profitability, also thanks to stable portfolio quality indicators and low risk cost. Moreover, business develops positively as we manage to grow loans and deposits alike and continue to expand our client base, thus also strengthening non-loan revenues. It is clear that high margins are supported in the short term, but we are already now laying the groundwork to structurally consolidate margins for the long run, placing high focus on profitable growth and building a larger and more granular deposit base and structurally manage refinancing costs. As always, Christian will provide you an update on Ukraine as our bank there continues to solidify after recognizing substantial losses last year.
We are still reducing portfolio, but in a very targeted and much less pronounced way than last year. At the same time, we are establishing the conditions for ambitious growth. For now, this means recruiting and training new staff, investing in IT and the optimization of client onboarding processes, expanding our deposit base, and tightening cooperation with international partners. I will also update you on our plan to convert into a stock corporation, as after the general assembly in June, this project is in full swing and we also have important news with regards to one of our medium-term goals, reaching carbon neutrality. With these opening remarks, let me turn to slide two. This highlight slide summarizes the encouraging results we achieved at this point of the year.
Our group achieved a result of EUR 64.1 million, helping the return on equity to a strong level of 14.2%, the best interim results since our stock exchange listing. Operating income increased strongly by 20%, as both net interest as net fee income continue to develop very positively. This has helped us to a cost income ratio of 59.7%, which adjusted for one-offs looks even stronger. The development with respect to the previous year is clearly positive. All our banks in Eastern Europe, including the bank in Ukraine, contributed positively to the result. Some of them show, in part, significant improvements in profitability and cost efficiency, and almost all of them account for solid two-digit return on equity figures. Earlier in May, we lifted our short-term outlook for the year 2023 because of these positive dynamics. We will cover our outlook at a later point in this presentation.
The strong development in our P&L was combined with resilient impact-oriented development of our balance sheet. Our loan portfolio increased slightly by 0.8% year to date, which includes a targeted reduction in Ukraine of around 5%. In Q2 alone, we achieved a solid growth of 1.6% as we see our SMEs return to higher levels of optimism with regards to the economy and increased appetite for investments. Our deposit to loan ratio increased to almost 105% as deposits continued to develop well and with a significant contribution from private individual clients. Our credit risk indicators are stable and support a low cost of risk of two basis points, which combined with the high net interest margin of 3.5%, enables strong net earnings generation. Our CET1 ratio increased by 68 basis points since the beginning of the year to 14.2%.
Important risk-weighted asset sufficiency measures, 57 basis points increase in the CET1 ratio result alone from higher RWA efficiency. Christian will cover the details. The financial performance at an all-time high, we also reached two very important non-financial milestones. With the inauguration of our solar park, ProEnergy in Kosovo, we have taken an important step towards our own climate neutrality, and continue to take a leading role in the ESG transformation of the region. We are also very pleased to announce that ProCredit's conversion into a stock corporation is moving forward in full swing. After the overwhelming approval from the shareholders in June, all other work streams are moving ahead smoothly, such that we can expect the conversion to become effective very soon. Slide three shows the development in customer loans. At the group level, the portfolio increased by EUR 48 million in the first half year.
That includes a reduction in Ukraine of EUR 33 million. Our focus remains on our core small business clients, who we think are often inadequately served by other banks, and to whom our house bank proposition adds most value. Vice versa, this segment typically provides good margins, a favorable deposit reciprocity, and low capital intensity. After reducing portfolio in quarter one, we achieved good growth in the second quarter of EUR 95 million, or 1.6%, especially as SME clients rediscovered their appetite for longer term investment loans. You can see on the lower half of this slide, the strong development in the green loan portfolio year-on-year, to reach over 20% of our total loan portfolio. Development in green loans in half year one was broadly in line with the development of the portfolio as a whole. Slide four shows the development in deposits.
Building a large and granular customer deposit base is a key strategic focus as we aim to solidify the high margins that are driving profitability today. We also see distinct potential for positive impact in providing secure, transparent, and accessible deposit services for our clients, and reinvest these funds in the SME sectors of our countries. The recent developments on deposits have been very encouraging. Year- on- year, deposits have increased by EUR 760 million, or 12.5%. In half year one, we achieved a deposit growth of over EUR 168 million, or 2.7%, which is good considering that deposits typically develop more strongly in the second half of the year. More importantly, the larger part of this growth has come from private individual client deposits, confirming the steady progress we make with our ProCredit Direct strategy.
Our deposits to loan ratio is up 1.9 percentage points year to date, and 13.7 percentage points year on year, with positive developments across almost all banks and notable improvements in key banks like Serbia, which historically have had a lower deposit to loan ratio and thus less favorable margins. Our high liquid assets and liquidity coverage ratio also improved markedly year on year. The group LCR stands at a strong 177%. As one would expect in a high margin environment, most of this growth comes through term deposits in line with market dynamics. Nevertheless, the increase in interest expenses still visibly lags behind the interest income, so importing an overall positive margin development. Christian will come back to the important issue of margin development. I already mentioned it earlier. Our success in this year is by no means restricted to good financial and business development.
With the opening of our first own solar park, ProEnergy in Kosovo, we have reached a crucial milestone on the road to climate neutrality, which we set out as a medium-term target to ourselves. We aim to achieve carbon neutrality essentially solely through internal measures, such as investments in energy efficiency in our premises, or the modernization of our car fleet with electric vehicles, as we view the buying and selling of emission offsetting certificates with a certain degree of skepticism. ProEnergy consists of more than 5,500 solar panels and has a capacity of around 3 MWp . We invested EUR 2.5 million. For us, this project carries particular significance and symbolism also because of the country it was built in, Kosovo.
Approximately 90% of Kosovo's electricity is generated by two large coal power plants, one just a few kilometers outside the country's capital, Pristina, causing the city to rank amongst the lowest in the entire world in terms of air quality. ProCredit has operated in Kosovo since 1999. As Kosovo's largest SME bank and largest German investment in the country, ProCredit has played an important role in the social and economic development of this young nation. For example, it was ProCredit Bank Kosovo, together with the German government, that brought in euro bills into the country after the euro was introduced as a currency in Europe in 2002. Like in our other countries of operation, we want to drive, together with our clients, the ESG transformation.
The investment in a solar park is therefore not only relevant for the group's own carbon footprint and the energy mix in Kosovo, but also serves as a higher symbolic value as we hope clients will draw inspiration from it. At the time when also greenwashing is evident within the financial sector, walking the talk by way of investing time and money in such a project is convincing to clients and other stakeholders alike. In Kosovo, we welcome the government's ambitious target for a 35% share of renewable energy consumption in the total mix and the installation of 1,300 MW of renewable energy capacity by 2031, and believe our banks will play a key role in achieving it. At last, let me also provide you an update on our project to convert ProCredit's legal form into a stock corporation.
The good news up front, we plan to complete the conversion in the coming weeks, certainly before September 30th, and are therefore well ahead of schedule. We announced the intention to convert in October 2022 after thorough discussions with our core shareholders, with the intention to strengthen our corporate structure and capital markets presence. After intensive months of preparation, we were pleased to be able to include the proposition in the convocation of this year's annual general assembly. The proposal was endorsed by 99.9% of the votes, reflecting the conversion only has upsides to investors. Since the AGM's resolution, we've been moving ahead with the final work streams, including the drafting of a conversion report, as well as a formal audit thereof. Within the coming weeks, we hope to finalize the registration of the conversion with the commercial register.
Once that has happened, the current class of shares of ProCredit Holding KGaA will automatically be replaced by the shares in the ProCredit Holding AG, while the total number and notional par value of outstanding shares will remain unchanged. The company shares will continue to be traded at Frankfurt Stock Exchange since no new admission procedure is required for the shares of the transformed company. We take pride in the successful execution of this important project, which is a consequential step in our long-term capital markets strategy. With this, let me now pass the word to Christian.
Thank you, Hubert. Let us now take a closer look at the financial performance of the group, both in half year one and quarter two, as well as the major risk and capital indicators as of June 30. Naturally, we'll do our regular deep dive on our bank in Ukraine, where indicators remain stable and the bank contributed a meaningful amount to the group's profit of more than EUR 12 million. As for the group results, we've already outlined that the developments remain very positive and can only inspire optimism with regards to our short and medium-term targets. Let's look at the line items one by one, starting with operating income and expenses. Operating income continues to grow strongly year-on-year. As of June, we recorded an increase of EUR 31 million or 19.7% due to improvements in net interest, net fee, and FX income.
This development comes on top of the strong year-on-year increase recorded last year of 24%. We are particularly encouraged by the fact that these are indeed very granular improvements materializing on the level of almost all ProCredit banks, showing that our business model does work well in all of our markets. Personnel and administrative expenses increased by EUR 18.2 million or 18.9%, which means that net of all our profit before tax and loss allowance expanded by an additional EUR 13.4 million. That's around 21%. Personnel expenses are the major driver behind the increase in the cost base. We will look at this more closely on a later slide. The cost-income ratio remained on a good level of slightly below 60%, and on an underlying basis, we improved by 1.5 percentage points to a good level of 58.3%. Let's move on to net interest income.
We continue to observe a positive quarter-on-quarter dynamic of both net interest margin and income as our loans and investment securities continue to reprice along the new interest rate levels. Increased excess liquidity on account of the very strong deposit growth of the last 12 months supports this development even further. With respect to quarter one, net interest income is up EUR 4.8 million. That's 6.8%, while the net interest margin increased by another 18 basis points. Year-on-year, net interest income is up EUR 30.8 million or 25%, to which almost all banks in our network contributed broadly in similar terms. The net interest margin in half year one has been at a good level of 3.5% and is thus 49 basis points above the half year 2022.
Overall, we continue to benefit from the higher interest rate environment, also due to our prudent and adaptive asset and liability structure. Loans are primarily variably priced. Investment securities, which are held for liquidity management purposes only, are mostly short-term, with maturities of less than 12 months, enabling a timely repricing of instruments. Liabilities are dominated by deposits, which again show for a healthy split between current savings and Term Deposits.
In the current interest rate environment, it is clear that the expenses from these instruments are also rising as both business and private individuals are increasingly seeking to invest in more long-term fixed deposits. The quarter-on-quarter increase of interest expenses of around EUR 5.2 million was primarily driven by higher and more expensive Term Deposits, but this has been fully offset by a EUR 10 million increase in interest income, coming again, primarily from customer loans, but also from higher volumes off and higher average margins on central bank balances and investment securities. Moving on to fee income. Net fee income increased by EUR 2.6 million with respect to half year 2022. That's an increase of almost 10% and underlines a steady positive dynamic in this important line item.
The growth of net fee income is driven by the steady organic expansion of our client base, especially in the so-called non-loan business client segment. These clients drive transaction volume, bring deposits, and form a valuable pipeline for more loan portfolio growth in the future. The graph below shows that the positive trends are granularly distributed among the major service categories, which are payments, cards, and letters of credit. More than that, net fees have grown broadly evenly in almost all our banks, reflecting a well-diversified business expansion across all markets. Quarter-on-quarter, we see an increase of net interest income of around EUR 900,000, which is in part due to the seasonally weaker quarter one performance. Compared to quarter two 2022, we actually see an even more pronounced increase of EUR 1.2 million or 9%. Moving on to personnel and admin expenses.
Our cost base has grown over the last quarters because inflation is driving prices and because we continue to invest strongly in many front office areas to further expand our positioning in our markets. I already touched on the year-on-year development of the cost base as we went through slide eight. Personnel expenses remain the major driver behind the cost increase, as we're increasing staff numbers across all levels and institutions, strengthening both front and back office functions. In addition, high inflation rates and tight labor markets have made it necessary to revise salaries on the level of basically all ProCredit institutions. Otherwise, we continue to invest in IT and marketing, especially as we aim to further position ourselves as an attractive direct retail bank in our markets.
Quarter-on-quarter, personnel and admin expenses grew by EUR 2.7 million, allowing for the cost-income ratio to solidify at a good level of slightly below 60%. Moving on to loss allowances. Similarly to quarter one, loss allowances continued to be relatively low also in the second quarter. All in all, EUR 500,000 for the half year. That corresponds to just around two basis points. In this context, it is important to be reminded of the substantial provisions that were billed last year, both in Ukraine but also on the level of the banks outside Ukraine, with management overlays of almost EUR 29 million, addressing risk factors related to inflation and energy supply. These management overlays have not been released in the first half year. Indeed, they have even slightly increased.
With portfolio quality indicators stable, we'll cover that in a second, provisions related to credit risk events were offset to a good degree by recoveries from written-off loans. Updates in the IFRS 9 model, including the periodic update of macroeconomic parameters, led to an overall release of provisions. Last but not least, we built some limited additional management overlays, including for the bank in Ukraine. Let's look at portfolio quality. Given the overall geopolitical and macroeconomic framework conditions, portfolio quality has remained remarkably steady in the first six months of the year, both in and outside Ukraine. In half year one, the share of defaulted loans improved slightly by 0.1 percentage points, both for the group with and without Ukraine. Compared to quarter one, the share of defaulted loans remained steady.
The share of stage two loans, on the other hand, increased in quarter two as a result of a larger portfolio analysis that we conducted across the group. In particular, we analyzed our clients' financials and thereby identified client groups whose repayment capacity could be impaired if interest rates were to continue increasing in the coming months. In this process, we transferred approximately EUR 45 million of loan portfolio into stage two on the level of the group. Moving on to capital. Our CET1 ratio stands at a good level of 14.2%. That is some 0.7 percentage points above the year-end figure. CET1 capital increased above all due to the attribution of year-end profits of approximately EUR 16 million. The total amount of CET1 capital of EUR 836 million does, however, not include any attribution of the interim results as of June of around EUR 64 million.
Risk-weighted assets dropped since the beginning of the year by EUR 182 million. That is against the trend of a growing portfolio and balance sheet as a whole. This encouraging development is mainly driven by a variety of RWA efficiency measures that have been taken in the course of the last 12 months, which have helped reduce risk-weighted asset density by eight percentage points year-on-year to a level of below 66%. In our last call, we already reported on the extension of the MIGA agreement, which helps us reduce risk weight from central bank balances, which are otherwise set at 100%. During the Ukraine Recovery Conference in June, we were able to increase the program further, giving additional coverage to our exposure in Ukraine and reducing our risk-weighted assets by approximately EUR 35 million.
Should be noted that due to the country's sub-par sovereign rating, all funds at the Ukrainian Central Bank are currently weighted at 150%. Beyond the very fruitful collaboration with MIGA, we finalized an important securitization project with the European Investment Fund, providing coverage to a significant part of our Bulgarian portfolio and reducing risk-weighted assets by around EUR 180 million in the process. Overall, our capitalization is at a solid level and provides a CET1 buffer of more than five percentage points. Under next year, we will attribute 2/3 of the half-year result to our core capital, which brings the pro forma CET1 ratio as of June 30 to 14.8%. The remaining 1/3 of the half-year profit will be accrued for dividend purposes, as we intend to propose to next year's General Assembly a distribution of 33% of the year-end result.
Let's move to the segments, as well as our deep dive on Ukraine. Very shortly, our banks in Southeastern Europe continued to achieve very convincing results. Their contribution to the consolidated profit was EUR 44.7 million, averaging a return on equity of 13.2%. The cost-income ratio of this very large segment is with 54.6% below our group medium-term target of 57%. Our two Eastern European banks in Georgia and Moldova contributed EUR 13.9 million to the consolidated result. That corresponds to an ROE of 18.9%. Lastly, South America or our Ecuadorian bank, recorded a small loss of EUR 400,000. I will add a few thoughts on Ecuador later. Overall, the group's financial performance is strong. That is with or without a strong contribution of ProCredit Bank, Ukraine.
This bank's interim result of EUR 12.4 million was helped by a good net interest margin of 5.4%, a low cost of risk of 13 basis points, and a steady cost base. The group ROE, without the Ukrainian contribution, is at a good level of 11.2%, which is 1.6 percentage points above the previous year level. Taking a deeper look into the performance of our segments, and the banks therein, as I mentioned, profitability in Southeastern Europe continues to improve both structurally and in absolute terms. Higher net interest income on the back of stable margins helped achieve an almost 30% increase in operating income. The net interest margin is at a good level of 3.2%, which is 70 basis points above the previous year, and the cost of risk is at a steady level of 20 basis points.
On a bank level, return on equity and cost-income ratio improved or remained at strong previous year levels with just one minor exception. In Eastern Europe, we see a similarly marked increase in operating income of around 10%. The cost-income ratio improved with respect to last year by 1.8 percentage points. Our banks in Georgia and Moldova increased their result contribution by almost 50%, reaching an average ROE of close to 20%. With Ukraine's strong contribution of more than EUR 12 million, the segment's ROE is at a good level of 25%. Coming back to Ecuador, which is shown at the bottom right corner of this slide. I already pointed out the small interim loss of EUR 400,000 after the bank did indeed show some very promising dynamics last year.
Ecuador is the only bank in our network not benefiting from the current interest rate environment, as lending rates in the country are capped by the Ecuadorian Central Bank. Higher dollar rates, therefore, increase refinancing costs without any relief on the asset side, thus putting pressure on net margins. We are, at this point, steering against this difficult regulatory environment by focusing our disbursements on lower volume segments with higher lending caps, and this has been having very good success thus far. Let's move on to Ukraine, for which again, we prepared a special slide summarizing the main events of the year. However, in terms of banking operations, there is indeed very little to report.
Loan disbursements are constrained as we limit ourselves to existing clients outside the conflict area, and at the same time, we are laying the foundation for future growth in what will hopefully be soon a new post-war era for the country. For example, we are achieving substantial growth in our deposit base. EUR 70 million year to date, that's more than 11%, helping a 32 percentage point increase in the bank's deposit-to-loan ratio since the beginning of the war. Also, ProCredit Bank Ukraine is one of the very few banks active in the local labor market, selectively hiring and training youngsters. Beyond that, we are also invest in our front-end applications and smooth and further automatized digital client onboarding processes. Overall, the bank is in good shape. I already highlighted the bank's strong profit of more than EUR 12 million, which corresponds to an ROE of close to 40%.
The portfolio reduced slightly in quarter two, approximately EUR 4 million, bringing the year-to-date reduction to EUR 33 million. In this context, we highly appreciate the new coverage provided to us by MIGA earlier in June, because besides sending a strong political signal, the allocated funds make a big difference for us on the ground, helping us to work with more clients in the short-term future. The share of defaulted loans remains steady at 12.4%, and in the red zone, we reduced our exposure slightly since the end of the year, to a level of EUR 52 million.
Capitalization is at a good level of more than 13%, which provides a buffer to requirements of more than six percentage points. While things do look encouraging overall for our bank, recent events like the termination of the grain deal and the attacks on grain infrastructure are not yet reflected in the half-year's result. Let me now give the word back to Hubert for a short wrap-up on guidance.
Thank you, Christian. Let me make some brief concluding remarks on our outlook. As I mentioned earlier, the positive trends of the first half of the year have moved us to lift our short-term targets for this year. For the return on equity, we raised our target by two percentage points to 8%-10%, and for the cost-income ratio, we reduced our target by one percentage point to 62%-64%. It is clear that the strong half-year results put us on a very good course to achieving these targets. We continue to plan cautiously in light of the ongoing escalations in Ukraine, such as the destruction of the Nova Kakhovka dam and the attacks on grain infrastructure in Odessa and along the Danube River. Our guidance foresees medium single-digit growth in our loan portfolio.
We think the second quarter growth puts us on a good pathway to achieving this result. Similarly, our CET1 ratio of 14.2% and the leverage ratio at 9% are at good levels and very much in line with guidance. We are naturally cautious in extrapolating current results, particularly given that the conflict in Ukraine remains a significant factor of uncertainty. The results are very encouraging and provide a solid foundation for a successful year 2023 and for structurally delivering on our midterm guidance. On slide 22, you see our confident midterm outlook. We spent some time on the guidance in our analyst workshop in March, so I will not dwell on it again now except to say that we feel confirmed in our confidence based on our half year one results.
We see continued steady loan growth, potentially in our core SME and green sectors in all markets to drive medium to high single-digit group growth rates. As credit risk costs attached to Ukraine stabilize, and we continue to profit from steady margins and scale effects, we see the potential for return on equity of around 12% in the midterm. This assumes a cost of credit risk between 25 and 30 basis points, which takes into account an ongoing macroeconomic uncertainty and its full cycle impact. When it comes to Ukraine, we see the downside to our group limited, given that substantial losses from the portfolio in the eastern part of the country have since last year been largely reflected in full in our financials. We would confirm our return on equity target even in the event of a full loss scenario.
On the other hand, we see broader upside potential, which, due to the uncertainty on timing and nature of the reconstruction of the country, is difficult to quantify. Currently, we quantify this upside potential by merely assuming that our bank would return to its pre-war course of operations, growing its business by approximately 10%-15% per year and delivering a return on equity of around 20%. With this in mind, we see a medium-term upside potential on group return on equity of +1% to +1.5% PA. As we grow the loan portfolio whilst maintaining steady margins, we see good opportunities to bring our cost-income ratio below 60% to around 57%. Also here, there is potential upside from a comprehensive reconstruction scenario. In summary, we see our strong half year one results to certainly support our midterm guidance.
As we are committed to combining this improved financial performance with strong development impact, we aim to increase the share of green loans to 25% of the portfolio. More broadly, if and as soon as the situation in Ukraine stabilizes, our bank there will play a valuable role in vital recovery initiatives. Equally, we look forward to supporting our SME clients to grow, formalize, and contribute to sustainable regional development in our Eastern European and the West Balkan countries of operation as they accelerate their EU accession efforts.
We are very conscious of the prevailing challenging context, we are also confident in our long-term experience in working in volatile countries and building on their opportunities whilst managing risks intelligently. We believe this confident midterm outlook will also support our impact-oriented capital markets positioning as we implement the conversion of our legal form. I shall end on this positive note. This concludes our assessment of our year-to-date group's performance. Christian and I would now take your questions.
Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star then one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Once your name has been announced, you can ask a question. If you are using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time. Our first question comes from Milosz Papst from Edison Group. Please go ahead.
Yes. Thank you for taking my questions and congrats to another set of good quarter results. Firstly, I just wanted to ask about the situation in Ecuador. Given what's happened currently in terms of the political instability and the gang violence, do you see any impact on the willingness of SMEs to invest currently, and what you see in terms of the deposit growth? Obviously, I see the headline figures in terms of the deposit loan ratios and what's happening with deposits, but maybe you can shed some light on that. Secondly, you've touched upon, obviously, Russia's withdrawal from the grain deal. I just wonder if you can, at this stage, comment in any way on how this may impact your portfolio of loans to agricultural clients in Ukraine, and should we expect any additional loss allowances in Q3?
Finally, I believe you've completed your annual salary review in July. In the first half of the year, average salaries went up by 9%. Can you give us any indication for the full year? Thank you.
Thank you, Milosz. Yes, indeed. Ecuador, you pointed out the political instability, if you like, and the increased violence, also by criminal gangs. Obviously, also the recent assassination of Fernando Villavicencio, the presidential candidate. The elections in Ecuador are about to happen, at least the first round now in August. The second round will likely happen in October. I think indeed the political uncertainty, also in light of the elections right now, does indeed reduce the appetite for investments in Ecuador, at least also of larger investments from larger SMEs. As we mentioned in the call, we are right now mostly shifting our focus on smaller and very small SMEs. That means loan sizes of in around EUR 100,000.
We are basically going back to the roots when it comes to finding our core qualities in the Latin American market, with the benefit also there right now of strengthening margins structurally. In this segment, the lending caps imposed by the Central Bank of Ecuador are significantly higher and allow for more flexible pricing. Otherwise, in terms of deposit growth, we have managed an increase in deposits also in Ecuador. Possibly not as strongly as in other banks, but that is also due to the fact because liquidity in the Ecuadorian market has been moved towards safer markets, predominantly the U.S. That is usually the effect when interest rates on USD increase, then there is a lot of USD liquidity leaving Latin American markets. We've seen this phenomenon now also in Ecuador.
Nonetheless, deposit to loan ratio of the bank has increased from 63% in June 2022 to what is now close to 70%. I would also take your third question, apologies, on the annual salary review. Due to the strong inflation that's been hitting our markets over the last 12-18 months, the salary review is no longer fully concentrated across the group. We have been adjusting salaries in a rolling pattern, so to say, over the course. Indeed, some of the institutions have performed a salary review now in July, and it will lead to higher personnel expenses also in the third quarter, but it's not happening in bulk as we've been used to in the past. Hubert will take your question on Russia.
Let's come back to your question regarding the grain deal and its potential, or the suspension or interruption of the grain deal, and its potential consequences for our loan loss provision. You have to bear in mind that at the group level, we have 20% of clients of our loan portfolio is in the agricultural sector. It is even higher in our ProCredit Bank. Therefore, the suspension of the Black Sea grain deal does have an impact. It is still difficult at this moment in time to exactly foresee how that is ultimately going to impact our loan loss provisions in Ukraine. As we said before, we have currently very low loan loss provisions of roughly two basis points at the group level. In Ukraine alone, of 13 basis points in the first half of the year.
In particular, due to the uncertainty regarding the escalation in Ukraine, and the grain deal is an important element of that, we still continue to guide these basis points of up to 45 basis points at group level. That would allow for substantially higher loan loss provisions. As I said, it very much depends on how the situation in Ukraine will evolve, for how long the suspension of the grain deal will last, and how much affected will be alternative export routes, which Ukraine is obviously exploring. You have seen that over the last couple of days or the last couple of weeks, Russia has, in addition to attacking the ports on the Black Sea itself, also attacked the ports along the Danube River. It is yet premature in our view to say how, or to make a judgment how that's going to exactly evolve.
Certainly, this is a risk factor also for the guidance, and we will have to observe the situation in the next weeks and months very carefully. Though having said that, we are convinced that the 45 basis points, which we guide for in our guidance, ought to be the upper end, because it would already include more adverse conditions than the ones which we see right now.
Perfect. Thank you. Just as a follow-up question, can you remind us what guarantees from international financial institutions you have in place for the Ukrainian portfolio? Also for the agricultural portfolio in Ukraine.
I don't have the volumes now, but we still have guarantees from the DCFTA program. We have guarantees from EBRD for agricultural clients specifically, and we also have some guarantees from the Ukrainian government that were provided last year.
Okay, perfect. Thank you very much.
Our next question comes from Marius Fuhrberg from Warburg Research. Please go ahead.
Hi, thanks for taking the questions. Basically, one follow-up regarding the grain deal and the outcomes of that. How fast would you think the effects from the canceled grain deal will show in your customers' repayment behavior and thus in your risk costs? I think, or to my assumption, this is a major implication for your guidance because if the risk costs remain below 20%, you will obviously come out with a return on equity much stronger than the guided 10%. A second question regarding the net interest margin. Should we expect this to be stable at the current level going forward? Or will this revert to a little bit lower levels of like 3.4%? All under the assumption that we will more or less see an unchanged central bank policy environment from now on, and that the times of large interest rates are over.
Mr. Fuhrberg, if you allow me, I would start answering your first question on how soon the suspension of the grain deal ought to be reflected in repayment behaviors of our customers and therefore also in our loan loss provisions. As I said, that is very difficult to foresee. It very much depends on the actual development and how much As I said, number one, how long the suspension will last, and secondly, how much it will affect the alternative export routes which clients might be using. We will have to assess that at a client-by-client level. I do assume that we will see already in the third quarter how the situation overall in Ukraine evolves, but it is still premature to say when exactly we can assess how repayment patterns by clients will ultimately affect the loan loss provisions in the remainder of the year.
Okay, maybe one follow-up. Is it fair to say that if the grain deal would not have been canceled, you presumably would have increased your guidance once again?
I would not go as far. I would rephrase it and say, obviously, the overall escalation in Ukraine constitutes one of, if not the, most central risk or more critical risk factors which also affect our overall guidance for the current year.
Okay.
Let me also add, Marius, the termination of the grain deal does not present to us a completely new situation. The grain deal was put in place only in late July last year, which means that our clients have had the experience of what it means to have severe constraints on their exporting capabilities. It's not entirely new, as Hubert said, it's mostly a question of how long this is going to last and to what extent alternative export routes will be impacted. On your second question on the net interest margins. Yeah, we see that in quarter two. First of all, we've had still a very positive dynamic compared to the first quarter. Let me also add that we have had a steady repricing of loans thus far, but also not on the level of all banks.
The increase in interest income is driven both by loans on the one hand, but also by the repricing of central bank balances and investment securities. On the one end, there is still a potential for loan portfolios in certain countries to reprice. We always have to move in line with local market developments. At the same time, there's, of course, also a dynamic of term deposits that is continuously strong. The strong deposit growth that we achieved in the first half, it was almost exclusively achieved through TDs because this is simply where the market is currently growing, and rates are still increasing. We have these two effects, and based on these two effects, it's very difficult to make any assumptions about where this will go.
There is, as I said, there is still a pronounced effect on both sides, which gives you maybe some information on how to project this line item.
Okay. Thank you.
Maybe I just might add something to that. We do obviously benefit from an overall increase absolute interest rate level, but we are not relying on that moving forward. We are putting high emphasis, and we have been putting high emphasis over the last year already on making sure that our growth in the loan portfolio and also in the deposit portfolio is very granular, so that we shift also on the liability side more to retail clients, which provide ultimately a more granular and therefore also less expensive refinancing. On the asset side, we focus on these, say, smaller segments of our client base, which do have the advantage not only to consume less capital, but also to structurally provide higher margins.
What we are working on and have been working on, and that's also part of the expansion of the margin last year, is to make sure that on both sides of the balance sheet, we make the composition of deposits and loan as granular as possible so that irrespective of the absolute amount highness of the interest rates, we still stabilize and strengthen our margin going forward, making us less dependent on the overall interest rate level.
Well, got it.
As a reminder, if you wish to register for a question, you may press star and one. Our next question comes from Philipp Hässler from Pareto Securities. Please go ahead.
Yes, Philipp Hässler from Pareto. I have three questions, please. Firstly, on your tax rate outlook for 2023 Q2, tax rate was very low at 15%. Could you give us an update what you expect for the full year? On your capital ratio, if I've seen it correctly, the regulatory requirements for your capital ratios have increased during Q2. Maybe you can elaborate a little bit and explain the reasons for this. Does this have any impact on your targeted capital ratios going forward? Last but not least, your PV park in Kosovo, do you plan to operate additional solar parks in other countries, or is it more or less a one-time project for you? Do you make money with this, or is it more like a pro bono project? Thank you.
Thank you, Philipp. On the tax rate outlook, the tax rate that is implicit from our current financials is really just a function of the different tax rates of the countries in which we operate. I would call this our normalized tax rate, indeed. Probably if you look in our historical financials, you will see always possibly some relatively higher tax rates, which are usually a function of either individual loss-making banks, one, or even discontinued operations. The tax rate that is implicit right now is a good indicator going forward. However, that said, in the second half year, we do expect some more significant dividend payments from our subsidiaries, which will be subject to withholding tax.
From these dividend payments, we do expect additional tax expenses in and around EUR 2.5 million to EUR 3 million, depending on the timing also of the decisions, whether they will be taken still in this year or next year.
That means that. Sorry to interrupt you. The tax rate for 2023 should be somewhat above the H1 level?
It will be slightly above due to these withholding taxes.
Okay.
That will be also reflected in the same position. On the capital ratio, we did talk about this, I think also in the year-end call, and also in the quarter one call. The this year's supervisory review process did result in a higher add-on for capital requirements. It increased from 2% to 3.5%. To your question, whether this changes anything on our view on our capital ratio target levels, no. The CET1 buffer is at a very comfortable level of five percentage points, including the newly increased capital requirements. No impact on our view there. Sorry, there's an additional question on the solar park.
Yeah. I'm happy to answer the third question on ProEnergy, the solar park. As I explained before, the main driver for us to install and have the solar park in Kosovo is not predominantly for us to make money, as you put it, but to offset our emissions. You have to know that we, as I said before, we are skeptical about this trade in certificates offsetting emissions, and we try to offset emissions by own initiatives, as I said, by upgrading our premises, also by exchanging our fleet to electric cars and the like. It is very difficult in the countries where we operate by such measures to completely offset your own emissions. Therefore, the only way we had to really come close to carbon neutrality for our own emissions is by producing electricity in the form we do with the ProEnergy park in Kosovo.
That was the main driver. It was not so much to have a new business line, which is more attractive than our traditional banking business. It does, however, to us, have this additional element that we wanted to provide a showcase how even in a country as polluted as Kosovo and still lacking to a large degree the necessary framework, how in a country like this, you can start supporting the ecological transformation. For us, this has a different angle and a different reason to exist, which goes way beyond the pure financial elements.
We do not lose money on that park, but it would not be a super attractive investment given, in particular, the time and effort we had to invest to set it up in an environment which was not yet ready and where we set a precedent on purpose to have a showcase how the ecological transformation can be done and can be supported, even if in a country which is yet at the beginning of this transformation.
This means that it could happen again. In another country to offset emissions, you could start and build and operate your own PV park again? You wouldn't rule that out?
I would not rule that out. Actually, we would have an option, in particular in Kosovo, to expand the park if we deemed that reasonable at some moment in time. There is an option. The option is there on purpose. As I said, Kosovo is one of the countries with the lowest air quality, globally speaking, and therefore we have implemented in this project an option to expand it. That would be the most natural expansion if we were to expand it at all. I wouldn't rule it out at all.
Okay. Very interesting. Thank you very much.
Thank you all for your participation. I hand back to Hubert Spechtenhauser for closing comments. Please go ahead, sir.
Covering our half 2023. We hope to have given you as much transparency as possible. If you have any additional questions, please do not hesitate to contact Christian or Nadine. The next scheduled conference call will take place when we publish our quarter three results on November 14th, 2023. Thank you again for your participation.