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We no longer expect Grenke to materially outperform financial institutions rated 'BBB', in
terms of profitability and risk-adjusted margins. Our base-case scenario indicates that the
increase in interest rates, inflation, and credit risk costs will weigh on margins. We therefore
anticipate that, by 2024, Grenke's core earnings to S&P Global Ratings risk-weighted assets
before diversification (S&P RWA) will be 1.3%-1.6%, its cost-to-income ratio (CIR) will be
53%-56%, and its average return on common equity (RoE) will be 7%-10%. Although we consider
this represents a sound performance, given the difficult market and Grenke's credit profile, it is
comparable with 'BBB' peers and below Grenke's outstanding pre-pandemic results of about 2.4%
earnings to RWA, 41% CIR, and 15% RoE, respectively, in 2019. Accordingly, we no longer apply a
positive comparable rating adjustment based on earnings to the group's SACP.
We project that the bank's cost of risk and nonperforming loans will be elevated, but
manageable. Although Grenke has plans for strong loan growth in a difficult market, we
anticipate that it will be able to manage its cost of risk. Cost of risk, measured using our definition
(new loan-loss provisions over average customer loans), peaked at 3.2% in 2020 from 2.2% in
2019; we expect it to decline to 1.9%-2.3% in 2023 and 2024. This is high compared with peers,
and the bank's nonperforming loan levels at year-end 2022 were also higher than peers, at 10%.
Our concerns are partially mitigated by Grenke's higher net interest margins, sound risk
management system, and the high granularity and collateralization of its portfolios. In addition,
Grenke's capitalization level has historically been one of the highest among its peers, and we
expect it to maintain this. We forecast that it will have a risk-adjusted capital (RAC) ratio of 20% by
2024, compared with about 22% at year-end 2022.
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