Bawag Group Ag Ord

Good day and thank you for standing by. Welcome to the Bawag Group Q2 2024 results call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll 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. There will also be a transcript published on the company's website after the event. I would now like to hand the conference over to your speaker today, Anas Abuzakouk, CEO. Please go ahead, sir.

Thank you, operator. Good morning, everyone. I hope everyone is keeping well. I am joined this morning by Enver, our CFO. Let's start with a summary of the second quarter results on slide three. During the second quarter, we delivered net profit of 175 million euros. earnings per share of two euros, 22 cents, and a return on tangible common equity of 24%. The operating performance of our business was very strong with pre-provision profits of 263 million and a cost income ratio of 33%. Total risk costs were 28 million, translating into a risk cost ratio of 27 basis points. We did not release any credit reserves with an ECL management overlay of 80 million. We have a low NPL ratio of 1.1% and continue to see solid credit performance across our businesses. In terms of our balance sheet and capital, average customer loans were down 1% and average customer deposits were up 1% quarter over quarter. Our CET1 ratio was 16.5%, up 90 basis points from prior quarter after considering the second quarter dividend accrual of 96 million euros. We have a fortress balance sheet with 12.5 billion euros of cash, an LCR of 220%, and overall strong asset quality. We continue to see a market where customers are cautious and adjusting to higher rates. We closed the second quarter with excess capital of 770 million euros, which we are investing in two strategic acquisitions. In February, we signed the acquisition of Knap Bank based in the Netherlands. which we forecast to add over 150 million euros of pre-tax profit by 2026. In early July, we signed the acquisition of Barclays Consumer Lending Business in Germany, which we forecast to add over 100 million euros of pre-tax profit by 2027. The two deals will consume approximately 250 to 300 basis points of CET1 capital and are subject to regulatory approvals. We have purposely maintained dry powder to pursue these two strategic acquisitions that will be highly accretive to the franchise and will further position us for continued profitable growth in our core markets within the Dahnel region focused on retail and SME. Moving to slide four, the acquisition of Barclays German consumer lending business will expand our footprint in the German retail banking space and position us for future growth in one of our core markets. The business has been operating successfully in Germany for more than 30 years and is one of the leading providers of credit cards in Germany and Austria. The business has 4.7 billion euros of assets comprised primarily of card and loan receivables, of which approximately 2 billion are revolving credit card receivables, which is the primary focus of the acquisition. The business raises deposits via cross-selling to credit card customers and is fully self-funded. This acquisition is a great strategic fit, providing us with a German consumer lending platform focused on credit cards, personal loans, and saving products across a large and diverse customer base. We will work with the current leadership team to continue growing the business in Germany and Austria, while also exploring potential opportunities in adjacent markets. We believe the combination of the business's leadership and team members with deep credit card expertise, coupled with the operating infrastructure of BAWA Group, will be a dynamic combination. We've had a presence in Germany since 2017 when we acquired SydWest Bank and subsequently completed small bolt-on acquisitions in the specialty finance space focused on dental factoring and IT and equipment leasing. The acquisition will consume approximately 140 basis points of CET1 capital. Given the nature of the transaction and the quality franchise we are buying, The deal will be P&L accretive day one and is forecast to contribute over 100 million of pre-tax profit by 2027 with EPS accretion greater than 10% without factoring in any future potential buybacks. The transaction is over two times more accretive versus pursuing a share buyback. The deal was underwritten with a premium to our ROTCE target of greater than 20%. The transaction is subject to customary regulatory approvals. Moving to slide five, let me provide a summary of the two deals signed this year and the overall strategic rationale. With the acquisition of Kanab Bank and Barclay's German consumer lending business, we will increase both our Dach-Nell footprint as well as our retail and SME business share from approximately 70% today to approximately 90% in the midterm when considering customer franchise and core revenues. Our strategic focus since our transformation in 2012 has been on growing our retail and SME franchise, which is granular, process-oriented, and systems-based. Additionally, we have been keen to grow in core continental Europe, what we refer to as the Darnell region, given the macro and microeconomic dynamics of the region. Our focus in the early years of our transformation was right-sizing the business and putting in place the building blocks to grow the franchise. In 2015, we were confident in the strong foundation we had established and executed our first acquisition with the purchase of Volksbank's Austrian leasing business and have closed 12 acquisitions since that point. This year, we've signed two strategic acquisitions that allow us to grow in several of our core products across new jurisdictions, focused on current accounts, credit cards, savings products, and mortgages. Both acquisitions are expected to be P&L accretive day one and are forecasted to add over 250 million euros of pre-tax profit by 2027. We're both underwritten to a premium of our ROTCE target of greater than 20%. We'll consume approximately 250 to 300 basis points of CET1 capital and are more than two times more accretive than share buybacks when using the average of our share price during the first half of 2024. We have been making good progress with the Kanab Bank integration and are on track for an expected closing in the fourth quarter of this year. Of course, subject to final regulatory approvals. The closing of Barclays Consumer Bank Europe is anticipated for the fourth quarter of this year or first quarter of 2025. Given the size of the acquisitions, we are planning to host the Capital Markets Day in early 2025. Once both acquisitions have closed, our goal would be to provide greater insights into our growth plans a refresh of our strategic pillars, and to set new mid-term financial targets. Moving to slide six, we delivered net profit of 175 million, up 5% versus prior quarter, and down 3% versus prior year. Overall, strong operating performance with total pre-provision profits of 263 million, flat versus prior year. Tangible book value per share was 37 euros and 20 cents, up 15% versus prior year, and 2% versus prior quarter. This assumes the deduction of the dividend accrual. Moving to slide seven, at the end of the second quarter, our CE2-1 ratio was 16.5% after deducting the dividend accrual. For the quarter, we generated approximately 90 basis points of gross capital through earnings. In addition, risk-weighed assets were down due to lower volumes in the corporates. We plan to invest our excess capital of $770 million to fund the two strategic acquisitions signed in 2024. On slide eight, our retail and SME business delivered a second quarter net profit of $135 million flat versus prior year and generating a very strong return on tangible common equity of 35% and a cost income ratio of 31%. Pre-provision profits were $206 million, up 4% compared to the prior year, with operating income up 5% and operating expenses up 7% versus prior year. Risk costs were $25 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 1.9%. We expect continued earnings growth across the retail and SME franchise in 2024, driven by strong operating performance and on the back of ongoing strong fee income. We expect muted customer loan growth this year, given the overall economic environment and subdued demand for mortgages. On to slide nine, our corporates, real estate and public sector business delivered second quarter net profit of 42 million, down 16% versus prior year and up 8% versus prior quarter, generating a strong return on tangible common equity of 24% and a cost income ratio of 23%. Pre-provision profits were 59 million, down 10% versus prior year. Risk costs were 2 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 10, an update on the real estate portfolio, which remains stable this quarter. The portfolio continues to perform well, reflecting the underlying exposure to residential, logistics, and industrial assets, which make up 66% of the total real estate portfolio and 77% of our total US exposure. Our office exposure in the United States stands at 375 million euros, slightly up versus prior quarter, which is solely related to FX movements. The performing U.S. office portfolio represents less than 1% of total customer loans and 6% of our total real estate exposure. The remaining U.S. office portfolio has a debt yield of approximately 9%, occupancy levels of approximately 80%, a weighted average lease term of six years with very solid tenants, and an LTV under 75%. With that, I'll hand it over to Anvir.

Thank you, Anis. I will continue on slide 12. A strong quarter with net profit of 175 million euros and the return on tangible common equity of 24%. While net interest income was down 1% versus prior quarter, the net commission income remained ongoing strong, up 1% in the second quarter. Year over year, core revenues were up 1% and flat versus prior quarter. Operating expenses up 1% in the quarter and cost income ratio at 33%. Risk costs were 28 million in the quarter, slightly lower than prior quarter. E-sale management only remained at 80 million euros. On slide 13, key developments of our balance sheet. A few things I would highlight here. Customer loans were down 3% in Q2 and 4% year over year. This was largely driven by the corporate's business. Our customer deposits were up 1% quarter over quarter. Our cash position increased to 12.5 billion euros this quarter. Cash and cash accruals make up approximately 23% of our balance sheet, leaving us with a very comfortable liquidity buffer to address potential organic and inorganic market opportunities in the coming quarters. Moving on to the next slide, our customer funding, which is made up of customer deposits and AAA-rated mortgage and public sector covered bonds, grew by 1% for this prior quarter to around 46.5 billion euros. Our cash position, as I said before, is now at $12.5 billion. In terms of customer deposits, no relevant structural changes in the second quarter. Repricing continued in line with our expectations, and the overall deposit betas are now at around 32%. We expect deposit betas to stay between 30% to 35% in 2024. With that, moving on to slide 15. core revenues, net interest income was down 1% versus prior quarter with a net interest margin of 300 basis points. Overall, we have seen lower volumes in the business and a pickup of deposit betas from 29% to 32%, leading to slightly lower net interest income. In terms of net commission income, up 1% with an overall good performance across securities and payments in our retail and SMA segment. For 2024, our guidance remains unchanged, we expect core revenues and net interest income to grow by 1%. On slide 16, operating expenses are up 1% versus prior quarter, largely driven by the collective bargaining agreement for banking having been finalized in March. We expect to offset the largest part of inflationary increase through further simplification measure and therefore expect a 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 17, risk costs. Overall continued strong asset quality with a low MPL ratio of 1.1%. We booked 28 million of risk costs in the second quarter, which was slightly below prior quarter. We kept our management overlay at 80 million euros. We expect risk costs in 2024 in the context of 25 to 30 base points. On slide 18, 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 around 3% growth. Forcible regulatory charges are expected to run $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 greater than $920 million, return on tangible common equity greater than 20%, and the cost-income ratio under 34%. And with that, let's open the Q&A, please.