Bawag Group Ag Ord

Good day and thank you for standing by. Welcome to the VAPGAP group Q3 2024 results call. 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 1 on your telephone. You will then hear an automated message advising your hand is raised. To answer your question, please press star 1 1 again. If you wish to ask a question via the webcast, please use the Q&A box available on the webcast link at any time during the conference. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Anas Abou-Sarkouk, CEO. Please go ahead.

Thank you, Operator. I hope everyone is doing well this morning. I'm joined by Enver, our CFO. Before we jump into 3Q results, I'm happy to announce that we received ECB approval for the acquisition of Kanab in the Netherlands last Friday. We're excited about welcoming the team, rolling out the integration plans, and pursuing the many opportunities ahead of us. As for third quarter results, let's start on slide three. We delivered net profit of 178 million, EPS of two euros and 25 cents, and a return on tangible common equity of 24 percent during the third quarter. Tangible book value per share was 38 euros, 48 cents, up by 16% versus prior year and up 3% versus prior quarter. The operating performance of our business was very strong with pre-provision profits of 265 million and a cost income ratio of 32%. Total risk costs were 25 million, translating into a risk cost ratio of 25 basis points. We utilized 10 million of our management overlay with the remaining ECL management overlay of 70 million. We have a very low NPL ratio of 1% and continue to see solid credit performance across our businesses. In terms of our balance sheeting capital, average customer loans were down 2% and average customer deposits were up 1%, quarter over quarter, when excluding the sale of our German Bausch Barkasse business. Our CET1 ratio landed at 17.2%, up 70 basis points from prior quarter, after considering the year-to-date dividend accrual of 286 million euros. We have increased our CET1 target to 12.5%, up 25 basis points, and adjusted our capital distribution threshold to 13% for the years 2024 and 2025. In light of our two strategic acquisitions this year, we have made adjustments to our capital framework, given several moving parts that I will address on the next slide. We have a fortress balance sheet with 15.6 billion euros of cash, equal to almost 28% of our balance sheet, an LCR of 260%, and overall strong asset quality. We are starting to see a pickup in customer activity across the franchise, albeit customers continue to remain cautious as they adjust to new normal of higher rates. Given the recent approval of the Kanab acquisition, we are increasing our full-year profit before tax target to over 950 million euros, to account for two months of the Kanab acquisition. We are also on track to deliver a full-year return on tangible common equity of greater than 20 percent and a cost-income ratio under 34 percent. The two acquisitions of Kanab in Barclays Consumer Bank Europe will consume approximately 500 million euros of excess capital, and we forecast to generate over 250 million euros of pre-tax profit by 2027. Therefore, We are targeting a year-end pro forma CET1 ratio of greater than 14% and excess capital of greater than 200 million euros. The first three quarters of the year have been defined by M&A and integration planning, ensuring constant dialogue with the businesses, our regulators, and laying out detailed integration plans. There has been a great deal of work taking place behind the scenes. We're excited about the opportunities ahead and laying the groundwork for success in the quarters ahead of us. On slide four, in terms of capital, this was a very busy quarter with several significant developments that I wanted to highlight. We ended the quarter with a CET1 ratio of 17.2%, up 70 basis points from prior quarter post-dividend accrual, and another quarter of very strong capital generation. We decided on several key capital items during the quarter considering our two strategic acquisitions. First, both Kanab and Barclays Consumer Bank Europe operate on the standardized approach. Given these acquisitions will grow our total balance sheet by approximately 35% and our retail and SME business by over 70%, we have taken a decision to return to the standardized approach for our retail and SME business. We informed the ECB of our intentions during the third quarter, which will be formalized in the first quarter of 25, and have already taken the full impact this quarter, adding over €900 million of RWAs to our retail and SME segments. which was offset by the sale of the German Bausch Barcaza business, executing a consumer unsecured SRT in lower business volumes. Ultimately, we took this decision to simplify our business, allow for more streamlined integrations, and better product alignment across the group given the convergence of the standardized approach to IRB for our business model. All of our past acquisitions were on the standardized approach, and we believe this better aligns with our product offering and an approach of centralized risk management across the group. As part of our overall capital planning, we plan to continue executing synthetic risk transfers, or SRTs, for both loss mitigation as well as capital relief purposes. Going forward, we will retain our IRB foundation and specialized lending models for our non-retail and SME customer businesses. Second, given the two concurrent acquisitions, our growing geographic footprint and the integration work ahead of us over the coming years, we have decided to increase our CET1 target by 25 basis points to 12.5 percent. We will also limit excess capital distributions for both 2024 and 2025 to over 13 percent, 50 basis points above our new target, to be both cautious and prudent as we integrate two large and strategic acquisitions. This reflects our disciplined approach to capital allocation in the changing contours of our business. More importantly, we forecast our pro forma year-end CET1 ratio to be over 14%. This takes into account the two strategic acquisitions, the impact of Basel IV, and a strong pipeline of lending opportunities we see in the fourth quarter. With a year-end pro forma CET1 ratio of greater than 14%, we will have generated gross capital over 360 basis points, deployed approximately 500 million of excess capital towards two strategic acquisitions that will add over 250 million of pre-tax profit by 2027, accrued an annual dividend of at least 400 million euros, returned our retail and SME business to the standardized approach, addressed the impacts of Basel IV, and we'll still have over 200 million of excess capital above our new capital distribution threshold of 13% for full year 2024. This is a true testament to the strong profitability and high capital generation of our business. We plan to hold an investor day in tandem with our year-end results on March 4, 2025, and we'll address potential capital distributions at that point. On slide five, our retail and SME business delivered third quarter net profit of $131 million, down 4% versus the prior year and generating a very strong return on tangible common equity of 33%, in a cost-income ratio of 32%. Pre-provision profits were 201 million, down 2% compared to the prior year, with operating income up 2% and operating expenses up 12% versus prior year. Risk costs were 25 million. The retail risk-cost run rate has now returned to pre-COVID levels as multiple stimulus and government support programs have now expired. We continue to see solid credit performance across the business with an NPL ratio of 2%. We expect continued earnings growth across the retail and SME franchise in 2024, driven by strong operating performance. Overall, we see muted customer loan growth given low new originations in the mortgage space, offset by growth in consumer and SME. Okay. On slide six, our corporates, real estate, and public sector business delivered third quarter net profit of $40 million, down by 6% versus prior year, and generating a strong return on tangible common equity of 23%, and a cost-income ratio of 26 percent. Pre-provision profits were 54 million, down 6 percent versus prior year. Risk costs were effectively zero. However, we used 10 million of our management overlay to address an NPL in our U.S. office exposure, which we have marked conservatively. Despite the office NPL, we continue to see solid credit performance across the business with an NPL ratio of 70 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 built a strong pipeline of new lending opportunities during the third quarter that we anticipate funding in the fourth quarter focused on both residential and public sector opportunities. On slide seven, an update on the real estate portfolio. Our real estate portfolio is stable this quarter. The portfolio continues to perform well reflecting the underlying exposure to residential, logistics, and industrial assets, which make up 69% of the total portfolio and 83% of our total U.S. exposure. Our office exposure in the United States stands at 264 million euros, down 59% versus the peak in 2022. The remaining portfolio is approximately 70% performing and 30% non-performing. The performing portfolio has a debt yield of approximately 10%, occupancy levels of approximately 80%, weighted average lease term of six years with solid tenants, and an LTV of approximately 75%. The performing U.S. office exposure represents less than 40 basis points of total assets in 4% of our total real estate exposure. As I've stated many times before, the stress we are seeing in certain asset classes, U.S. office in particular, will differentiate banks in terms of underwriting and asset quality as we see greater dispersion across lending portfolios. With that, I'll hand it over to Anvir.

Thank you, Anis. I'll continue on slide nine. A strong quarter with net profit of 178 million euros and a return on tangible common equity of 24%. While net interest income was down by 1% versus prior quarter, The net commission income remained strong, up by 1 percent versus prior quarter. Year over year, as well as versus prior quarter, core revenues were down by 1 percent. Operating expenses were flat in the quarter, and cost income ratios stood at 32.3 percent. Risk costs were 25 million in the quarter, down by 9 percent versus prior quarter. We consumed 10 million of the ECL management overlay, which now stands at 70 million. On slide 10, key developments of our balance sheet. A few things I would highlight here. Customer loans were down by 1% in Q3 and 3% year over year, which also led to a decline in risk-weighted assets. This was largely driven by the corporate's business. Our customer deposits were up quarter over quarter. Our cash position increased to 15.6 billion euros this quarter. Cash and cash equivalents make up 28% of the balance sheet, leaving us with a very comfortable liquidity buffer to address potential organic and inorganic market opportunities in the coming quarters. On the next slide, our customer funding, which is made up of customer deposit and AAA-rated mortgage and public sector cover bonds, is flat versus prior quarter at $46.2 billion, with our cash position now at $15.6 billion. In terms of customer deposits, we have not seen any relevant structural changes in the third quarter, and the overall deposit betas are now at around 35%, which is in line with our expectations. With that, moving on to slide 12, core revenues, net interest income was down by 1%, versus prior quarter, with a very strong net interest margin of 304 basis points. Overall, we have seen lower volumes in the business and an expected pickup of deposit betas from 32% to 35%. leading to a slightly lower net interest income. In terms of net commission income, up by 1% with an overall good performance across securities and payments business in our retail and SME segment. On slide 13, operating expenses are flat in the quarter. We expect to offset the largest part of inflationary increase through further simplification measures, and therefore expect a stable cost base in Q4. This is prior to any impact of M&A. Moving to slide 14, risk costs. Overall continuous strong asset quality with a low MPL ratio of 1%. We booked 25 million of risk costs in the third quarter and hold the management overlay of 17 million. We still expect risk costs in 24 in the context of 25 to 30 basis points. On slide 15, given the recent approval of the Knob acquisition, we are updating our full year profit before tax target. to over 950 million euros to account for two months of the Knob acquisition. And we are fully on track to deliver a return on tangible common equity of greater than 20% and a cost-income ratio of under 34%. We expect a year-end performance CET1 ratio of greater than 14%. Post two strategic acquisitions, dividend accruals of at least 400 million post Basel IV impact, and after return, a retailer SME business to the standardized approach. And with that, let's open the Q&A, please.