Bawag Group Ag Ord

Good day and thank you for standing by. Welcome to the BAWAG Group Q1 2025 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 and 1 on your telephone. You will then hear an automated message 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 website. I would now like to hand the conference over to your speaker today, Anas Abuzakouk, CEO. Please go ahead.

Thank you, operator. I hope everyone is well. I am joined this morning by Enver, our CFO. Let us start with the summary of the first quarter results on slide three. We delivered net profit of 201 million, earnings per share of 2 euros and 54 cents, and a return on tangible common equity of 26% during the first quarter. The performance of our business was strong, with operating income of 534 million, up 39% versus prior year, pre-provision profits of 336 million, and a cost-income ratio of 37%. As we closed Barclays Consumer Bank Europe in February, and are focused on integrating our acquisitions. Total risk costs were $59 million, translating into a risk-cost ratio of 43 basis points. We have a low NPL ratio of 70 basis points, down 10 basis points from year end, as we continue to see solid credit performance across our businesses. In terms of our balance sheet and capital, average customer loans were up 15%, and average customer deposits were up 16%. quarter over quarter. We have a fortress balance sheet with 15.3 billion of cash, an LCR of 213%, and overall strong asset quality. Our CET1 ratio stands at 13.8%, with 189 million euros of excess capital above our 13% capital distribution target. Today, our business is approximately 85% retail and SME and 85% dust now. with the low exposure to corporates that have an impact from tariffs and over 20% of our balance sheet in cash as we saw a great deal of froth in credit over the years. We will be patient as we adapt to changing macro conditions and the impact of tariffs. Moving to slide four, capital development. At the end of the first quarter, our CET1 ratio was 13.8% after closing of Barclays Consumer Bank Europe the return to standardized approach for the retail and SME business, the impacts of Basel IV, the execution of a mortgage securitization, and after considering the first quarter dividend accrual of 111 million. And we paid the dividend for the year 2024 of five euros and 50 cents per share on April 11. For the quarter, we generated 108 basis points of gross capital through earnings. We have excess capital of 189 million euros approximately 80 basis points above our capital distribution target of 13% for the years 24 and 25. On slide 5, our retail and SME business delivered first quarter net profit of $158 million, up 21% versus the prior year, and generating a very strong return on tangible common equity of 33% and a cost-income ratio of 39%, which includes two months of Barclays Consumer Bank Europe financials. Pre-provision profits were $264 million, up 30% compared to the prior year. The retail risk costs were at $48 million, with the risk-cost ratio of 53 basis points. We continue to see solid credit performance across the business, with an NPL ratio of 1%. We expect continued earnings growth across the retail and SME franchise in 2025, driven by strong operating performance as we fully integrate the two acquisitions as well as solid growth in the consumer and SME space, which will be offset by muted mortgage loan growth given overall demand and pricing levels that we see. On slide six, our corporates, real estate, and public sector business delivered first quarter net profit of $36 million, down 7% versus prior year, and generating a strong return on tangible common equity of 27% and a cost-income ratio of 23%. Pre-provision profits were $59 million, down 4% versus prior year. Risk costs were $9 million, resulting primarily from booking of a more adverse ECL macro provision. We continue to see solid credit performance across the business with an NPL ratio of 60 basis points, down 10 basis points from the prior quarter. On the back of a strong first quarter of originations, We have a solid pipeline of opportunities, but we'll be patient and see how customers react to the shifting macro and global trade situation. We will continue to focus on disciplined underwriting, risk-adjusted returns, and not blindly chasing volume growth. On slide seven, an update of the Kanab and Barclay Consumer Bank Year of Integrations. As far as our two strategic acquisitions are concerned, this year is about ensuring we fully integrate both deals and build a solid foundation for the future. There is a great deal of work taking place behind the scenes. We have been onboarding team members, decoupling from TSAs, integrating systems, harmonizing the data and applications landscape, and reinforcing leadership where needed to ensure a successful integration. Our goal is clear. We work as one team, and we speak with one voice as we position both businesses for future growth. It's early days, but we wanted to provide a snapshot of key developments in the progress being made. Six months into the Kanab integration, we completed data integrations, simplified the product landscape, and exited 75% of transitional service agreements, which we target to be completed by the middle of this year. Our focus in the coming months will be decommissioning redundant systems, continuing to reduce reliance on third parties, preparing the bank merger application to convert Kanab to a branch, and working on the migration of our mortgage servicer targeted for the first half of 2026. Overall, the business has been performing above expectations and we're already using Kanab best practices around customer onboarding. The teams are also assessing incremental product opportunities and hope to roll out a working capital facility to our Kanab customers. As we close on three months on the Barclays Consumer Bank Europe integration, we have already completed the data migration, simplified our product landscape, and exited several transitional service agreements, of which we hope to have completed within 12 months. The teams are working hard preparing for the credit card system migration, as well as the official rebranding to EasyBank Germany. Both the migration and rebranding are expected in early 2026. We're also working to centralize support functions and reduce reliance on third parties. A number of leaders have taken on group leadership positions, allowing us to draw on top talent across the group. Overall, the business has been performing ahead of expectations and we're excited about the many growth opportunities ahead. On slide eight, an overview of our balance sheet and asset quality. As we have entered a period of elevated uncertainty in both geopolitical and economic terms, we expect to capitalize on the strength of our balance sheet and disciplined underwriting. Our concentration in secured lending and commitment to the Dakhnel region supports a low risk profile with an NPL ratio of 70 basis points. well below 1%, where we've been running since 2021, as well as low volatility through economic disruptions. Our total balance sheet is 73 billion of assets, of which 15 billion, over 20%, resides in cash. We have been patient over the years with our excess liquidity, avoiding frothy credit markets as we felt credit risk was mispriced. We have 52 billion in customer assets, Over 80% of our customer book is secured or public sector lending anchored by a 27 billion mortgage portfolio with an LTV under 60% in the Dakhna region. The current environment of high uncertainty directly impacts corporate borrowers and has a second order impact on consumers overall as an economic slowdown would eventually increase unemployment rates. In terms of our book, our corporate lending exposure is only 2.7 billion euros or 4% of total assets. only 700 million or 25% of the corporate exposure and less than 1% of total assets has material reliance on export import markets and sales or supply chains. In addition, this book has a net leverage below four times and focuses on non-cyclical industries with strong cash flows, which provide resilience through downturns. Our consumer unsecured lending of 6 billion is more sensitive to macro developments and changes in unemployment rates. Over the years, we have tight underwriting to accommodate for inflationary impacts. Our real estate lending portfolio has an average LTV of approximately 50% and is made up primarily of residential and industrial logistics assets. Our U.S. office exposure, which accounts for 4% of total real estate lending and less than 40 basis points of total assets, has been the most distressed asset class we've seen since the financial crisis. However, our underwriting has been successfully tested and the U.S. office portfolio reduced with a resilient performing book looking forward. The recent market volatility from the short-term impacts of changing tariffs and more long-term impacts of a changing economic order and global trade will take some time to be fully understood. However, we have a solid foundation, a fortress balance sheet, and a leadership team that has worked together for over a decade navigating changing currents, as we aim to be a source of strength for the customers and the communities that we serve. With that, I'll hand it over to Amber.

Thank you, Anas. I will continue on slide 10. A very strong quarter with net profit of €201 million and a return on tangible common equity of 26%. Net interest income up 21%. Net commission income up 10% versus prior quarter. Overall, core revenues were up by 19%. Operating expenses were up by 20% in the quarter and cost income ratio stood at 37%. Risk costs were 59 million in the quarter, including higher risk costs for day one ECL and macro updates. On slide 11, key developments of our balance sheet. Customer loans were up by 9% in Q1 and 46% year over year, mainly driven by the two acquisitions. Cash position is now at $15.3 billion and makes up 21% of our balance sheet, leaving us with a very comfortable liquidity buffer to address potential organic and inorganic market opportunities in the coming quarters. The next slide, our customer funding, which is made up of customer deposits and AAA-rated mortgage and public sector cover bonds, is up 1% versus prior quarter and stands at $62.2 billion, with our cash position now at $15 billion. Overall deposit betas at 44%, including higher beta deposits of recent acquisitions. With that, moving on to slide 13, core revenues. Net interest income of $446 million was up by 21% for this prior quarter, with a very strong net interest margin of 331 basis points. Overall, we have seen solid volumes in the business and an uptick in deposit betas, mostly coming from recent acquisitions. In terms of net commission income, up by 10% with an overall good performance across trading, advisory and payments in our retail and SME segment. For the rest of the year, we expect a quarterly net interest income of above 450 million euros and net commission income of above 85 million euros. On slide 14, operating expenses are up by 20% of the quarter driven by the acquisitions and presenting the new run rate of the group. We expect the cost line to be about 800 million for full year 2025, which includes any integration costs. On regulatory charges, we accrued for the higher bank levy as proposed by the Austrian government program, expecting a full year contribution of 40 million euros in total. Moving to slide 15, risk costs. Overall, continued strong asset quality with a low MPL ratio of 70 basis points. We booked 59 million of risk costs in the first quarter, representing the risk profile of a larger group and new product mix, as well as risk costs related to day one ECL and macro updates. For 2025, expect risk costs to be at around 40 basis points, including any securitization costs. Finally, on slide 16, our 2025 outlook and targets, we reconfirm all our midterm targets and our 2025 outlook and targets with a net profit of greater than 800 million euros and an earnings per share of greater than 10 euros. And with that operator, let's open the Q&A, please. Thank you.

Thank you. As a reminder, to ask a question, you will need to press star 1 and 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 and 1 again. Please stand by while we compile the Q&A queue. We'll now go to our first question. Our first question comes from the line of Gabor Kemeny from Bernstein Autonomous. Please go ahead. Your line is open.

Hi, Kim. Thanks for the presentation. My first question is going to be on the Austrian litigation issue. I believe you booked some charges with the Q1 results. As far as I can tell, maybe a few million euros. And you had these useful disclosures earlier on what... on how you think about the portfolio being at risk, which I believe implies somewhere around one and a half billion, maybe a bit more than that, based on where you charge upfront fees, which you indicated earlier. So my question would be how you derived the litigation costs you booked from this portfolio, please. That's the first one. And the second one is on NII, where you seem to be trending pretty well. I believe you were close to the 450 million run rate you indicated, while an additional month of the Barclays Germany integration would give you another 30 million. So is it fair to say that your NII is trending ahead of the expectations you provided or you had a few months ago, please? Thank you.

Thanks, Gabor. Good questions. I'll take the legal question and then you take the NII. So as far as the legal, the processing fees that you're referring to, we've been in active discussions with the ABBA DECOM or the AK. Those discussions are ongoing. We booked a provision. We will not disclose the amount of the provision. As you can imagine, those discussions are sensitive and confidential. But most importantly, we feel good about our full-year targets, and we reconfirmed our full-year targets in spite of whatever the outcome is from those negotiations.

You want to take the NIA? Yes, on the NIA trend, yes, I think it is fair to say that we are ahead of our expectations for Q1. The only thing I would say in addition to what you said on an extra month of Barclays contribution is that we see, obviously, rates coming further down Also, the outlook for the next coming months is a lower interest rate level than what we expected, which then obviously will come also with a higher compression on the NII side. That is something that needs to be factored into that as well.

Got it. Thank you. Thanks, Deborah.

Thank you. We'll now move on to our next question. Our next question comes from the line of Hugo Cruz from KBW. Please go ahead. Your line is open.

Hi. Thank you for taking my question. I just wanted to get more of a breakdown on the risk cost. So you've disclosed what the Barclays day one ECL was, for example, or is there any other kind of moving parts within that risk cost figure? Thank you.

So, Hugo, if you look at the overall risk of 59 million, I would say probably if you think about the run rate, we had a 30 million run rate before the acquisitions. We said that every month of Barclays is in the range of 6 to 8 million, and that is true as well for the first quarter. So that gets you to, like, mid-40s. And the residual to the 59 is a mix of macro, which was mostly broken corporates, day one ECL, and the legal provision for the Supreme Court case.

Okay, perfect. Thank you very much. Thank you.

Thank you. We'll now move on to our next question. Our next question comes from the line of Amit Ranjan from JP Morgan. Please go ahead. Your line is open.

Yes, hi. Good morning, and thank you for taking my questions. I have two, please. First one is on the excess capital distribution. Can you please talk us through the thought process here? I saw some comments around application for approval in first half 25. Is that contingent on some milestones around the two integrations? Or what other considerations drive that decision, please? And the second question is around cost of risk again. Was booking a management overlay talked about in first quarter, or was it beyond the cutoff point in first quarter? It is something that could be considered for the future, given the current macro uncertainty. Thank you.

Thanks, Amit. I'll take the buyback question and then the cost of risk. So as it relates to the buyback, obviously we stated that we needed to close Barclays Consumer Bank Europe. We have the first quarter behind us. We have not filed anything to date, but the expectations is hopefully that should happen in the first half of this year. And we gave guidance in terms of what our excess capital is, which was in line pretty much with our pro forma that we had communicated that year.

Yeah, the cost of risk. I think, I mean, you said the macro-overlay that you booked in Q1, is that something we expect for the rest of the year, I guess? From today's perspective, no, we don't expect that to be recurring for the rest of the year, and we stick to our guidance of 40 basis ones for the full year. Okay. Thank you very much.

Thanks, Owen. Thank you.

Thank you. We'll now move on to our next question. Our next question comes from the line of Borja Ramirez from City. Please go ahead. The line is open. The line of Borja Ramirez is open from City. Please go ahead. Your line is open.

Oh, sorry. Hopefully you can hear me now. Sorry, I was being a bit slow with my mute. Sorry. I have a quick question on the NII. So, you have confirmed the 2027 net profit targets despite the decline in forward rates. I think that's very reassuring, and I think this may confirm the fact that you are geared to – positively geared to the steepening of the yield curve. For example, I think your structural hedge has an ocean of 40 billion euros, if I'm not mistaken. You have 25% of the balance sheet in cash that can be redeployed into highly yielding assets. And lastly, you have 90% of the housing loans in fixed rate, and that can be repriced at high long-term rates, potentially. So a link to this, I would like to ask if you could give a bit more details on your NII gearing to this deepening of the yield curve. Thank you.

Good question, Boris. I think there were different parts. Yes, so first we did reconfirm our mid-term targets. In terms of NI gearing, what we mentioned on bright poles, we tried to be fully hatched on both sides of the down tube. So irrespective of the, if it's fixed or floating grid assets, we move it down to floating grid assets. So the only thing that really impacts the ni gearing is the structural hedge on the deposit side and that is geared into more steeper curves so while we do have a negative impact from lower rates that we expect short though we do have a positive impact from more steeper rate curve that is currently reflected so that's why net net we don't see a significant impact on the ni for the medium or long term

Thank you. We'll now move on to our next question. Our next question comes from the line of Noemi Peruk from Mediobanca. Please go ahead. Your line is open.

Good morning. Thank you for taking my question. My first one is on loan growth. we have seen consumer and public sector lending so strong and weak corporate and housing still. Could you walk us through like the drivers and the main geographies behind this trend? And I was wondering if these are in line with expectation or whether maybe we could towards the lower end of your growth guidance in the plan given the current macro environment. And I also have a question on your macro updates. If you could just share with us the GDP growth you embedded in your assumptions now just to make, to understand how stressed indeed your level of provisioning is at the moment. And then final question on capital. The press mentioned a few SST transactions in the making a few months ago. I think one is already behind us. And I was wondering if indeed there are more to come, and if so, how sizable they could be and how early we could see their benefits. Thank you very much.

Thanks, Naomi. All good questions. I'll take the long growth and then you take the macro risk and then SRT discussion. So long growth, Naomi, you know, we don't put volume targets. And the reason we don't put volume targets is the macro condition obviously fluctuates and we want to be disciplined in our underwriting as we think about risk-adjusted returns and also have the flexibility. Having said that, if I go through kind of the asset classes and the regions I think that you were asking about, I can give some commentary. When you think about housing loans in kind of the Dachau region, the challenge there, in particular in Austria and Germany, is both from a pricing as well as a demand standpoint. Pricing is very tight when you look at credit spreads, and the demand is muted, especially if you compare it to 2022, which was a high watermark. point as far as overall volumes, and that still has yet to return. Consumer and SME is probably a different story. We've seen robust opportunities in terms of personal loans. We just closed on Barclays Consumer Bank Europe, and actually that is performing better than we had anticipated in terms of overall revolver balance. So we see a pickup in demand in kind of the consumer unsecured, as well as leasing and factoring in SME probably to a smaller extent And then as far as the corporates, public, and real estate, if I go through that, public sector, we've seen robust demand there. We think there's good opportunities. Given the spread levels and just given the market volatility, there were certain opportunities in terms of spreads widening and good risk-adjusted returns. Real estate, we continue to be really conservative. If you think about just the go-forward originations, we've seen good opportunities in the U.S., in particular with residential, but we see a good pipeline both U.S. as well as Europe. And then the corporates has been the most challenged space. That's one where we just believe credit risk has been mispriced, and it's been really frothy. You see that also to a certain extent in securities portfolio, but that's one where we'll be patient. And given the changing macro condition, kind of this reordering of global trade, you actually might see dislocation in opportunities for good corporate lending, which we haven't seen, quite frankly, for quite some years. So I know you're looking probably for a specific volume target, but I just tried to give you a perspective on just the different asset classes in the regions. You want to take the macro risk and capital?

Yes. So the other two topics on the macro updates. So what we did, we don't disclose the exact numbers, but we had very low GDP growth in the assumptions of Q4. And with the updates in Q1, pretty much the GDP growth comes close to zero. That was the main adjustment that we made in Q1. On the capital, I think the question only was around SRPs and if we plan to do more in the future. Yes, so we do plan to do more in the future. We still see a constructive market in the SRP space. We don't rely on it. So for us, it will always be something that we decide portfolio-wise. on every single deal. If it makes sense, we'll do it. If it doesn't make sense, we don't need to do it.

Just to add on the SRTs, there's an element, obviously, we're on a standard approach for the majority of our business, but we've also looked at SRTs over the years as a loss mitigation in terms of tail risk. And I think those are good indications of how we think about managing our balance sheet. It gives you a sense whether it's in mortgages, consumer unsecured, corporates. We've used it as a tool in terms of just overall loss mitigation.

Okay. Thank you. And could you perhaps share the potential benefit of future SOTs as of now? Thank you.

No, we have not shared. Okay.

Thank you. Thank you. We'll now move on to our next question. Our next question comes from the line of Johannes Thormann from HSBC. Please go ahead. Your line is open.

Good morning, everybody. Just some questions for me as well. First of all, on your cash on the balance sheet, it's, of course, comforting, but to which extent are you willing to draw down the current amount? Maximum of 50% or even to a stronger extent? And then what's your time horizon to get a feeling for this also if you're seeing better opportunities in corporate lending? And in this respect, also in your mortgage business, do you see any change in the risk or in the appetite of customers to apply for more mortgages in the Dachau region or is this unchanged in your businesses? And then last but not least, you talked about the simplification of the product range at KNAPP and BacklayCAD. Can you give us any examples? Because, for example, on the BacklayCAD homepage, it looks pretty much unchanged. Thank you.

Yeah, so on the first one, Johan, it's on the cache. Right now, the balance is around 20% of our balance sheet is in cache, around 5% is in securities. How we think about it, probably more sustainable long-term balance is half-half. So we will not be ever using all our cash and deploy the securities, but they're actually 50-50 is a good split. But right now, we don't see a lot of opportunities because the spreads have tightened again. So we'll remain patient on that side. On the long growth, I think Enes mentioned it. We see slowly, very slowly, a bit of an uptick in demand, but it's really still quite muted on the mortgages.

The product, that's more on the Barclays side. That's reflecting on the partnerships. So it's more of a monoline product. Obviously, they do P-loans as well, but that was more a commentary on certain partnerships. Thank you. Thank you.

Thank you. We'll now move on to our next question. Our next question comes from the line of Tobias Lukesch from Kepler Shavra. Please go ahead. The line is open.

Thank you very much. Two questions from my side as well, please. First, on consumer loans, maybe you can give us a bit of a sense how you see the market developing. in Austria, but also in Germany and where you might see differences. Also, if I got you correctly, you did some micro adjustments, but this was mainly on the corporate side. So what is your thinking about the retail where might you see changes here that might affect your assessment in Q2, Q3? And secondly, again, on capital distribution and potential share buybacks, is there a bit of a nearer timeline you can give us in terms of when we should expect a potential announcement of an additional share buyback? Thank you.

So, Tobias, I think on the consumer side, no, we don't really see it. Any difference between Germany and Austria? Very stable, both in terms of low demand. It's been quite stable also with the last couple of quarters and the same as what you're seeing right now. Probably a bit more focused on Austria than in Germany. More opportunities there. In terms of risk profile, no, we haven't seen any changes. To be a bit more specific, there is a macro update as well for retail. It was just a bit more pronounced on the corporate side. And on the timeline is we can't really say more than what Anna said, so it's something for the second half that we're looking to.

Thank you.

Thank you. There are no further questions at this time, so I'll hand the call back to Anna for closing remarks.

Thank you, operator. Thank you, everyone, for joining our first quarter call. Look forward to catching up with you during the second quarter. Take care.

Bye. This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.