Bawag Group Ag Ord

Good day and thank you for standing by. Welcome to the BAVA Group Q1 2024 Results Conference Core. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 and 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 and 1 again. Please be advised that today's conference is being recorded. A transcript will be published on the company's website. I'd now like to hand the conference over to your speaker today, Anas Abou-Zakouk. Please go ahead.

Thank you, operator. I hope everyone is keeping well this morning. I'm joined by Enver, our CFO. Let us start with the summary of the first quarter results on slide three. We delivered net profit of 167 million euros, earnings per share of two euros and 11 cents, and a return on tangible common equity of 24% during the first quarter. The operating performance of our business was very strong with pre-provision profits of 258 million and a cost income ratio of 33%. Other income of minus nine million related primarily to other operating expenses tied to legal, tax, and transactional advisory costs on M&A deals. The bulk of these costs will be capitalized when deals are closed. Total risk costs were $30 million, translating into a risk-cost ratio of 28 basis points. We did not release any credit reserves, with an ECL management overlay of $80 million. We have a low NPL ratio of 1%, and continue to see solid credit performance across our businesses. In terms of our balance sheet and capital, average customer loans were flat and average customer deposits were up 1% quarter over quarter. Our CET1 ratio was 15.6%, up 90 basis points from year end 2023 after considering the first quarter dividend accrual of 92 million euros. And we paid the dividend for the financial year 2023 of 5 euros per share, or 393 million, on April 15. We have a fortress balance sheet with excess capital now at 623 million euros, approximately 12 billion euros of cash, an LCR of 217 percent, and overall strong asset quality. We continue to see a market where customers are cautious and slowly adjusting to higher rates, as we maintain our outlook for static to modest customer loan growth. We have earmarked our excess capital for the acquisition of Kanab Bank, which we signed earlier this year. In addition to other strategic M&A that we are at an advanced stage, we have purposely maintained dry powder to pursue these strategic M&A opportunities that will be highly accretive to the franchise in both earnings as well as allowing us to grow our retail and SME franchise and our footprint in the Dakhnel region. Today, our franchise is approximately 70% retail and SME focused, with 70% of our customer business in the Dakhnel region. In the mid-term, we see this migrating to 80-90% retail and SME focus, with 80-90% of our customer business in the Dakhnel region. The first four months of this year have been defined by M&A and integration planning, ensuring constant dialogue with regulators, targets, and laying out our detailed day two plans. There has been a great deal of work taking place behind the scenes. We're excited about the opportunities ahead and will provide more details as the year progresses. Moving to slide four, we delivered a net profit of $167 million, up 20% versus prior year, and a record first quarter result. Overall, strong operating performance with total pre-provision profits of 258 million, up 4% versus prior year. Tangible book value per share was 36 euros, 33 cents, up 16% versus prior year, and 3% versus prior quarter. This assumes a deduction of the first quarter 2024 dividend accrual. On to slide five. At the end of the first quarter, our CET1 ratio was 15.6%. after deducting the first quarter dividend. For the quarter, we generated approximately 90 basis points of gross capital through earnings. We also executed the corporate securitization transaction, which accounted for the majority of lower RWAs in the quarter. Our excess capital of 623 million euros, or 340 basis points, provides us with enough dry powder for strategic M&A opportunities, both signed and in the pipeline. On slide six, our retail and SME business delivered first quarter net profit of $134 million, up 14% versus the prior year, and generating a very strong return on tangible common equity of 36% and a cost-income ratio of 30%. Pre-provision profits were $208 million, up 9% compared to the prior year, with operating income up 7% and operating expenses up 4% versus prior year. Risk costs were $26 million. The retail risk costs run rate has now returned to pre-COVID levels as multiple stimulus and government support programs have now expired. However, we continue to see solid credit performance across the business with an NPL ratio of 1.8%. We expect solid operating performance across the retail and SME franchise in 2024, but muted customer loan growth given the overall economic environment. On slide seven, Our corporates, real estate, and public sector business delivered first quarter net profit of $39 million, up 5% versus prior year, generating a strong return on tangible common equity of 22% and a cost-income ratio of 27%. Pre-provision profits were $58 million, down 1% versus prior year. Risk costs were $5 million. We continue to see solid credit performance across the business with an NPL ratio of 80 basis points. We pride ourselves on disciplined underwriting, focusing on risk-adjusted returns and not blindly chasing volume growth as we continue to remain patient and disciplined. We have the capital and liquidity to support our customers as we expect markets to normalize in the next few quarters. On slide eight, an update on the real estate portfolio. We experienced a 2% reduction quarter over quarter in our real estate portfolio. the bulk of which was related to U.S. office. The portfolio continues to perform well, reflecting the underlying exposure to residential, logistics, industrial, and hospitality assets, which make up 75% of the total real estate portfolio and 85% of our total U.S. exposure. Our office exposure in the United States stands at 371 million euros, down 19% versus prior quarter due to refinancings, The performing US office portfolio represents less than 1% of total customer loans and 6% of our total real estate exposure. This remaining portfolio has a debt yield of approximately 9%, occupancy levels of approximately 80%, a weighted average lease term of six years with solid tenants, and an LTV under 75%. We believe the worst is behind us in terms of stress on our portfolio, with our U.S. office portfolio reducing in size and other asset types continuing to perform well. For our remaining office portfolio, in certain cases we've been able to negotiate equity contributions resulting in deleveraging and or additional equity to improve the properties and attract additional tenants. As I've stated before, the stress we are seeing, particularly in commercial real estate, will differentiate banks in terms of underwriting and asset quality as we see greater dispersion across lending portfolios. With that, I'll hand over to Anvir.

Thank you, Anis. I will continue on slide 10. A strong quarter with net profit of $167 million and the return on tangible common equity of 24%. While net interest income was down 1% versus prior quarter, The net commission income was up 4% in the first quarter. Year over year, core revenues were up 7% and flat versus prior quarter. Operating expenses up 2% in the quarter and cost income ratio now at 33%. Risk costs were 30 million in the quarter, stable versus the prior quarter. UCL management overlay remained at 80 million. On slide 11, key developments of our balance sheet Few things I will highlight here. Customer deposits were down 3% in Q1 and flat year over year. This was largely driven by seasonally high deposit balances at year end versus first quarter. Our average deposits were actually up by 1%. Customer loans went up 1% while our risk weighted assets came down by 4%. And this is largely due to a corporate secularization transaction that was executed in the first quarter. Our cash position came down to $12 billion this quarter, also driven by the full pay down of the remaining TLT role tranche. Cash and cash equivalents make up approximately 22% of the balance sheet, leaving us with a very comfortable liquidity buffer to address potential organic and inorganic market opportunities in the coming quarters. Next slide, our customer funding, which is made up of customer deposits and AAA rated Mortgage and public sector cover bonds grew by 1% since year end and 5% year over year to around 46 billion euros. Cash position now at 12 billion. In terms of customer deposits, no relevant structural changes in the first quarter, repricing continues in line with our expectations. Overall deposit betas now at around 29%, expected to grow to 30% to 35%. and peak in the coming quarters. With that, moving on to slide 13, Core Revenues. Net interest income was down 1% for this prior quarter, with a net interest margin of 296 basis points. Overall, we have seen stable margins and volumes in the business, with a pickup of deposit betas from 25% to 29%, and a lower day count, leading to a slightly lower net interest income. In terms of net commission income, up 4% with an overall good performance across securities and payments in our retail and SME segment. For 2024, our guidance remains unchanged. We expect core revenues and net interest income to grow by 1%. On slide 14, operating expenses are up 2% versus prior quarter, largely driven by a full quarter of Idaho First Bank in the numbers and some inflation effects. the cost income ratio increased slightly to now 33%. In March, the collective bargaining agreement for banking was finalized with an agreed 8% wage increase in Austria, which is in line with our expectations. That will be partly offset by our ongoing optimization programs, mostly through further simplification and standardization across the group, leaving us with an expected cost increase of around 3% for 2024, before any M&A. Our expectation for regulatory charges in 2024 remains at around $16 million, or $4 million per quarter for the remainder of the year. Moving to slide 15, risk costs. Overall continued strong asset quality with a low NPL ratio of 1%. We booked $30 million of risk costs in the first quarter, which was in line with prior quarter. We kept our management over $80 million, and we expect risk costing 24 in the context of 25 to 30 base funds. On slide 16, we reconfirm our outlook and targets for 2024. This is based on current interest rate expectations and assuming no M&A in 2024. We are targeting net interest income and core revenue growth in 2024 of 1%, while containing operating expenses to 3% growth. Perceivable regulatory charges are expected at around 16 million in 2024. Based on overall macro environment, the recent underlying trends, and solid asset quality, the risk-cost ratio is expected to be between 25 and 30 base points. The financial target for 2024 is a profit before tax of greater than 920 million euros, return on tangible common equity greater than 20%, and the cost income ratio on the 34%. And with that, let's open up the call for Q&A, please. Thank you.