Bawag Group Ag Ord

Good day and thank you for standing by. Welcome to the BAVAG Group Full Year 2025 results call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during this 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 withdraw your question, please press star 1, 1 again. Please be advised that today's conference is being recorded. There will also be a transcript on the company's website. I would now like to hand the conference over to your speaker today, Anas Abou-Zakouk, CEO of the company. Please go ahead.

Thank you, operator. Good morning, everyone. I hope everyone is keeping well. I'm joined this morning by Enver, our CFO. So we have a lot to cover. Let's jump right into it with a summary of full year 2025 results on slide three. For the full year 2025, we delivered a record net profit of 860 million euros, earnings per share of 10 euros, 87 cents, and a return on tangible common equity of 27%. The underlying operating performance of our business was very strong with pre-provision profits of $1.42 billion, up 31% versus prior year, and a cost-income ratio of 36%. Total risk costs were $228 million with an NPL ratio of 80 basis points. The fourth quarter was particularly strong with a net profit of $230 million, return on tangible common equity of 28%, and a strong springboard as we entered 2026. We exceeded all of our 2025 targets and distributed 607 million euros to shareholders, 432 million in dividends, which was equal to 5 euros and 50 cents per share, and 175 million euros share buyback, translating into a cancellation of 1.6 million shares or 2% of shares outstanding. Since our IPO in October 2017, we have reduced shares outstanding by 23%, with 77 million shares outstanding as of year-end 2025. We closed the year with a pro forma CET1 ratio of 14.6%, after setting aside 481 million for dividends, equal to 6 euros 25 cents per share, which we will propose at our annual shareholder meeting in April, as well as deducting the 75 million euro share buyback that we completed earlier this year. The recent buyback was used to fund employee stock and remuneration programs, as we are keen to avoid diluting our shareholders. Our liquidity position is robust, with cash of $14 billion, equal to 19% of our balance sheet. Organic customer loan growth was strong, up 3% year-over-year when excluding the Barclays acquisition. Including the Barclays Consumer Bank Europe acquisition, customer loans were up 12%. Net interest margin for the business was 329 basis points, up 22 basis points from prior year, and reflecting the positive impact from the German credit cards and strong growth in consumer and SMEs. Despite our record performance in 2025 and an EPS CAGR of 14% over the last three years, our best years lie ahead. Our strategy has been consistent since 2012, one focused on being patient, disciplined, cutting through the noise, and embracing a continuous improvement mindset. Our resilience is proven by our ability to consistently deliver results and improve each year. On the back of strong customer loan growth in 2025, In the integrations delivering ahead of plan, we are updating our targets and introducing a new three-year rolling outlook. We are now targeting net profit of over €960 million in 2026, over €1.1 billion in 2027, and over €1.2 billion in 2028, excluding any potential acquisitions. This translates into a net profit CAGR of 12% over the next three years from 2025 through 2028. We also continue to build up excess capital with over 1.1 billion euros projected from 2026 through 2028, leaving us with over 1.5 billion euros of excess capital, which includes our pro forma excess capital of 468 million euros to earmark towards M&A capital distributions or potential new growth opportunities above our stated plans. It's important to note this excess capital is incremental to the capital underpinning our updated three-year targets and post our 55% dividend payout ratio. Through the cycle, we are targeting a ROTCE over 20% and cost-income ratio under 33% as the franchise continues to reap the benefits of long-term investments and scale as we build out a pan-European and U.S. banking group. When we refer to through the cycle, there will be years we deliver higher returns given the current rate environment and benign credit cycles. with our targets representing a more conservative floor. However, our goal is to consistently deliver results and be prudent in how we run the bank, accounting for the cyclical nature of markets and lending. Our CEQ1 target remains at 12.5%, 227 basis points above our minimum regulatory capital requirements. Going forward, we plan to provide a rolling three-year outlook with full-year earnings. allowing for a more dynamic outlook that captures internal as well as external developments more real-time. Okay, moving to slide four, our capital development. At year-end 2025, our reported CET1 ratio landed at 14.2%. We generated 417 basis points of gross capital from earnings, closed on the Barclays Consumer Bank Europe acquisition, using 180 basis points when compared against year-end RWAs, and made or slash earmarked capital distributions equal to 350 basis points, which comprised of earmarked dividends of 481 million euros, as well as 250 million euros of share buybacks completed across two tranches. We also completed three SRT transactions, which funded the underlying business growth and provided the net capital relief of approximately 60 basis points. On a pro forma basis, our CET1 ratio was 14.6%. equal to 468 million euros of excess capital above our CET1 target of 12.5%. This factors in the sale of a minority investment that signed in the fourth quarter of 2025 and is expected to close in the first half of this year. This excess capital starting point provides us with significant amount of dry powder to capitalize on unique organic and inorganic opportunities should they arise. It's important to note that both the Kanab and Barclays Consumer Bank Europe acquisitions were fully self-funded. As our owner-operators, we strive to be good stewards of capital, prudent and disciplined in how we allocate capital with a strong aversion to diluting shareholders. However, this is only made possible because of our very strong earnings and capital generation as we are positioned to deliver a through-the-cycle return on tangible common equity of over 20%. Slide five, positioning our balance sheet for growth while staying conservative. A key pillar to our strategy is maintaining a conservative balance sheet that is positioned for growth, ensuring we have excess capital and liquidity, and always focusing on risk-adjusted returns, taking a proactive approach to risk management. As we look ahead to 2026 and beyond, we have positioned our balance sheet in a few ways. We have purposely kept an excess cash position, providing us with dry powder from a liquidity standpoint. We have $14 billion of cash equal to 19% of our balance sheet, and our securities portfolio remains underinvested at $3 billion, equal to 5% of our balance sheet, while we target more of a long-term range of 15% to 20% in a more attractive spread environment. We continue to be patient and disciplined and will be ready to deploy into customer lending as well as adding to our securities portfolio when the right opportunities present themselves that meet our risk-adjusted returns. As far as customer loans, We are focused on secured and public sector lending with an inherently low risk profile, as well as providing us with a source of long-term funding. Over 80% of our customer book is secured or public sector lending that is conservatively underwritten and well-collateralized. Housing loans account for over 50% of our customer loans, with an average LTV of 55% on the non-guaranteed mortgages. In total, 60% of the mortgage portfolio has NHG government guarantees, insurance, or risk transfers. Additionally, we have $13 billion of covered bond funding relative to approximately $40 billion of mortgages, commercial real estate, and public sector assets, with significant potential for further long-term covered bond funding. Over the years, we have deployed various risk management tools to proactively mitigate credit risk and free up capital to fund growth, using CDS, direct insurance, and significant risk transfers, or SRTs, in the form of cash and or guarantees. We use SRTs specifically to free up capital to fund growth and as a loss mitigation tool with an emphasis on unsecured lending. Today, SRTs have become quite prevalent, but our focus over the years was risk mitigation, accounting for through-the-cycle losses and ensuring we stay competitive from a risk-adjusted return standpoint. This has become more pronounced across mortgage lending as we transition to the standardized approach in 2024. Today, SRTs cover $9 billion of assets on the balance sheet of which 6 billion, or two-thirds, are tied to mortgages on the standardized approach. SRTs on mortgages improve capital efficiency on a low-risk asset class, allowing us to fund growth and better compete with IRB banks and non-bank lenders. SRTs on unsecured and specialty finance assets, which account for 3 billion euros, primarily consumer loans, credit cards, and corporate loans, mitigate risk of unexpected losses and work more as an insurance policy. specifically against volatility of macro-sensitive assets. In terms of lending activity, 2025 was another year defined by being patient and disciplined. Although we saw pickup in lending activity across consumer and SME, the pricing environment is still challenging across mortgages and corporate lending. We have strategically avoided chasing growth as credit markets remain frothy given the number of players driving down margins and foregoing loan protections. We believe credit risk in general is mispriced. given geopolitical risks, the fiscal situation of many sovereigns, and a flawed short-term focus on aggressively pushing lending volume given the perpetual need to deploy capital as incentives have decoupled from performance. On the flip side, our commercial real estate business continues to perform well, and we are finding pockets of opportunity. This is a result of our conservative underwriting over the years and underlying exposure to residential, industrial, and logistics assets, which make up approximately 80% of the portfolio. The U.S. office sector overall remains distressed. However, we are now seeing pockets of opportunity in select idiosyncratic transactions across the capital structure. Moving to slide six, building a pan-European and U.S. banking group. Our success over the years is a result of embracing a continuous improvement mindset, one that allows the company to constantly adapt. This past year was no different. Even though our company is in great shape, we must adapt from a position of strength not fall victim to complacency. The recent acquisitions have been a catalyst for building the operating framework for a pan-European and U.S. banking group. As we look to the future, we must challenge the status quo and reimagine the company. In the face of shifting demographics, changing customer behavior, and transformative technologies, we need to ensure that we stay competitive and relevant for the long term. Over the years, we have transformed from a branch-heavy business with limited digital capabilities to a digital first bank complemented by a high-quality advisory branch network. We self-funded 14 acquisitions, expanded them to six new countries, and built a strong leadership team with a deep bench and an owner-operator mindset. Today, our business is 90% retail and SME, 90% digital originations, and 90% tied to the Euro countries of Austria, Germany, the Netherlands, and Ireland. With the integrations of our two recent acquisitions largely complete, We are positioning ourselves for future growth, both organic and inorganic. We have redesigned a company to reflect both the broader footprint as well as capture new opportunities. We are starting to see the benefits of greater scale and efficiencies, greater digital engagement, a wider geographic footprint, and more opportunities to pursue. Most importantly, our transformation over the years has been anchored to our culture. We foster an owner-operator mindset. encourage entrepreneurial thinking, and continuously challenging the status quo. Our senior leadership team embodies stability and dedication with the management board and senior leaders collectively owning approximately 5% of the company. This reflects our owner-operator culture and commitment to long-term success of the franchise. This group has an average tenure of 12 years. 25% of our current leadership team joined through prior acquisitions, and we continue to build a deep bench of leaders cultivated through internal development programs, mentoring, strategic recruitment, and acquisitions. This is vital as we expand into a pan-European and U.S. banking group, ensuring we have the proper bandwidth and skill set to grow the business and address the many challenges and opportunities ahead. Our future success depends on preserving this truly unique and dynamic culture as our company continues to grow and evolve. Okay, moving to slide seven, technology underpinning our transformation. AI is the next slide. Despite our achievements over the years, we recognize that ongoing technological disruption, specifically the rapid advance of artificial intelligence, demands that we proactively redesign our company. This era of innovation and disruption will fundamentally reshape how we serve our customers, structure our organization, and define the very nature of work. As a result, some technologies and processes will quickly become obsolete, requiring us to rethink traditional roles and create entirely new ones. The economic landscape is evolving in ways that are hard to understand or predict. Our goal is to proactively navigate these changes and ensure the long-term success of our franchise. We plan to incorporate AI into our operating framework. We will significantly enhance customer service, making this a true competitive advantage as we reduce friction in our processes, enable immediate and effective first-touch resolution, While we have already made significant strides in driving operational efficiency, we must remain focused on continuing to eliminate unnecessary bureaucracy, freeing up our people to engage in more impactful and rewarding work that requires more creativity, problem-solving, and critical thinking. Our goal is to free up advisors to spend more quality time with customers, enable our operations and call center teams to focus on more complex cases and portfolio management, and streamline central functions to play a more strategic role across the group. Central to our AI strategy is building the right technical infrastructure and fostering institutional expertise to remove friction for both customer journeys and internal operations. Our tech ops investments over the years have enabled us to fully migrate to the public cloud, enhance our data architecture, and adopt standardized workflow and reporting tools. This technical foundation will be the foundation for building an AI operating framework. one that seamlessly integrates technology, supports robust governance, and drives impactful use cases. To support this, we have set up a dedicated team of business process engineers within our tech ops group, combining process know-how with technical skills to lead AI initiatives in close partnership with functional experts. However, we believe that before AI can be properly implemented, there needs to be NI, or natural intelligence, around the process. This means team members with deep process and institutional knowledge working closely with business process engineers to redesign processes through simplification measures, basic workflow automation, and ultimately AI. We believe AI will ultimately enhance our operational excellence and best-in-class efficiency in the coming years, a true differentiator for Bawag and our competitive advantage. With that, I'll hand over to Enver.

Thank you, Anas. I will continue on slide nine. In terms of our balance sheet and capital, customer loans were up 2% and customer deposits were up 4% quarter over quarter. Organic customer loan growth was 3% year over year when excluding the Barclays acquisition. Including the Barclays acquisition, customer loans were up 12%. Tangible common equity is up 9% year over year after setting aside a 625 dividend per share or 481 million euros. in absolute terms, which we will propose at our annual shareholder meeting in April. We maintained a fortress balance sheet with 14.1 billion in cash equal to 90% of our balance sheet and LCR of 204% and overall strong asset quality with a low MPL ratio of 80 basis points. Moving to slide 10, a strong last quarter with net profit of 230 million euros and a return on tangible common equity of 28%. Core revenues were up 3% versus prior quarter with net interest income of 3% and net commission income up 4%. Operating expenses were down 3% in the quarter and cost income ratios stood below 34%. Risk costs were 64 million euros or 45 basis points in the quarter, including provisions for a single name default. On slide 11 of core revenues, Strong performance, net interest income was up 3% in the quarter, driven by robust custom loan growth of 2%, with strong momentum in real estate and public sector, solid consumer business, and stable mortgage lending. Net interest margin at 332 basis points improved on back of better asset mix, while deposit beta improved by 1 percentage point to 37% in Q4. Net commission income was up 4%, with continued strong momentum across business lines, particularly in credit cards and payments. For 2026, we anticipate a continued positive trend with net interest income and core revenues expected to grow by 6%. On page 12, operating expenses at 194 million euros, a 3% decrease for the quarter with the cost-income ratio at 33.8%, similar to levels before both acquisitions. To date, more than 80% of acquisitions have been successfully integrated as planned, and cost synergies have increased, particularly after the branchification of Knob last November. We continue to drive operational initiatives designed to streamline processes and enhance long-term productivity across our business lines. Combined with the completion of integration efforts, these measures are expected to improve our operational efficiencies. We expect a reduction in operational expenses by more than 5% in 2026. Regulatory charges are projected to increase by 9 million to 48 million euros in 2026 due to increased size of our balance sheet. Moving to page 13, risk costs were 64 million in the quarter, driven by a provision for a single name default and high share of retail consumer lending. Asset quality remains solid with an MPL ratio of 80 basis points. The expect continued strong asset quality in 2026 with a risk-cost ratio of around 45 basis points, mainly reflecting a higher share of consumer lending and otherwise strong credit quality. Slide 14, our retail SME business delivered a quarterly net profit of 210 million euros, a very strong return on tangible common equity of 39% and a cost-income ratio of 31%. Pre-provision profits were €343 million, up 10% compared to prior quarter, with core revenues 4% stronger versus prior quarter, while operating expenses were down 8% in a quarter. The retail risk costs were €58 million, with a risk-cost ratio of 60 base points. We continue to see solid credit performance across the business, with a low-impact ratio of 1.2%. Average custom loans and deposits grew by 1% through the quarter, and we expect continued growth across the retail SME franchise in 2026, driven by solid growth in consumer and SME, with mortgage origination slowly starting to pick up. On slide 15, our corporate real estate and public sector business delivered fourth quarter net profit of $37 million and generating a strong return on tangible common equity of 29% and a cost-income ratio of 23%. Pre-provision profits were $58 million, while risk costs were at $6.5 million, mainly tied to provisions for a single name default. Average assets were up 4% in a quarter, with strong momentum in real estate and public sector, while corporate lending remained muted. We'll continue with our current approach in 2026 and stay patient, focus on discipline and underwriting, risk-adjusted returns, and not blindly chase falling growth. Slide 16 are updated targets. following strong customer loan growth in 2025, and progress on integrations being ahead of plan, we are reviving our targets and the three-year outlook. We are targeting net profit exceeding €960 million in 2026, over €1.1 billion in 2027, and over €1.2 billion in 2028, with a 12% CAGR from 2025 to 2028, excluding any acquisitions. Our strategy focuses on improving operating leverage by increasing core revenues and consistently reducing expenses. Topline growth will come from 3% to 4% annual loan growth, a higher asset margin due to an improved asset mix, and positive effects from deposit hedge roll-off. Following integrations, we aim for annual net cost reductions through 2028. These efforts will drive ongoing improvement as we continue investing in advisory tech infrastructure, and data assets. Looking ahead with continued mix shifts and effective underwriting, we expect risk costs to remain at 45 basis points for the next few years. In addition to our profit targets, we plan to generate over $1.1 billion in incremental access capital by 2028, following a dividend payout of 55%. The resulting access capital of more than $1.5 billion by 2028 may be allocated towards organic growth initiatives, further M&A, or capital distributions. Through the cycle, targets remain unchanged within return on tangible common equity of above 20%, cost-income ratio of below 33%, and a CT1 ratio target at 12.5%. And with that, operator, let's open up the call for Q&A.