BAWAG Group AG

VSE:BG

Earnings Call Transcript 2018-Q1

[Operator]

Good day, ladies and gentlemen and welcome to BAWAG Group Q1 2018 Earnings Call. [Operator Instructions]

I would now like to turn the conference over to Anas Abuzaakouk, Chief Executive Officer. Please go ahead, sir.

[Anas Abuzaakouk, executive]

Thank you, Operator. Good morning, everyone. I am joined, this morning by Enver Sirucic, our CFO. Let's just jump right into it. So first quarter 2018, a strong performance, strong results for BAWAG Group. If we look at just the headline figures, profit before tax of EUR 116 million that doesn't tell the full story. Actually, on a normalized basis, profit before tax came in at EUR 142 million. The reason being the front loading of regulatory charges, which is just a mere accounting convention, 85% of the regulatory charges were accounted for in the first quarter. So if you normalize that to come out to EUR 142 million. That translates into a return on tangible equity, we always measure it against the 12% CET1. As a booking of EUR 116 million is 13% on a normalized basis, 16% in line with our expectations that we have for 2018.

Fully loaded CET1 ratio of 14%, this was a capital accretion of 50 basis points. This actually takes into account the 10 basis point negative impact from IFRS 9, so all in all a very good quarter in terms of capital accretion in addition to just overall earnings profile.

We continue to build our customer franchise. I'll talk a bit about what we're doing in terms of the operational strategic developments across BAWAG P.S.K Retail as well as easygroup but there's a number of initiatives that are positive on that front.

When you look at the overall strategy Südwestbank transformation is going very well, if you look at the roadmap that we've launched in the first quarter, this is focused on product channel profitability, efficiency and capital allocation. Most importantly, we signed a social plan with the workers' council in April and that's really going to be a catalyst for growth for cost out in the second half of 2018 and that was something that we were working on literally from the time we closed in December, in an amicable fashion, working with the workers' council to get that signed, so a really positive in terms of the transformation that we see happening in the second half of 2018 as well as carrying into 2019, so good news on that front.

In terms of M&A pipeline, no different than prior quarters, a robust M&A pipeline. The one thing I just want to focus on is the deals that we're looking at, will always have to meet the right underwriting guidelines, have to be disciplined in terms of the right strategic bids, so we talked about just the developed markets that we're focused on, as well as the right strategic fit -- as well as the right fit from a value standpoint. So a number of things we're looking on from small bolt-on acquisitions for Südwestbank to larger platforms both in Germany and Austria. So hopefully when something materializes we will be able to provide you guys with more details. Now as it relates to Deutscher Ring, which we signed in December of 2017 this is the Bausparkasse, Northern Germany we hopefully expect a closing in the second half of 2018.

When it comes to just the repositioning of our domestic retail franchise, I think this is best captured in what we call Concept 21, so this is the phraseology that we use in terms of the transformation roadmap, which the catalyst was really the separation from the Austrian Post which I'd mentioned in the full year '17 conference call, we'd find that in-- so February we're actually making really good progress in terms of the operational roadmap that we put in place, the committees that we have identifying new branches, hiring new advisors. And that's really a combination of the redesign of the network, putting together a mobile sales team, as well as entering into strategic retail partnerships.

And first and foremost on that front in terms of the strategic partnerships is, we just signed an exclusive partnership with MediaMarktSaturn. So they have about 35% of the electronic markets in Austria that's going to be a real key initiative in terms of customer acquisition. That partnership will come into effect in January of 2019. And what we hope to do is build on those type of partnerships in terms of point of sale financing, addressing the consumer lending space.

And then as far as just the PayLife integration that's been really -- really strong developments on that front, we've actually combined the credit cards team into an easy pay center of excellence, we were hoping that was going to happen in second half of '18 when we did the initial underwriting, that's actually been completed in the first quarter of '18, so well ahead of plan in terms of the PayLife integration.

And in the terms of the technology transformation. I talked about this at year end, this is really -- there is more to come in the subsequent quarters, but this is really going to focus on how we're automating, digitizing and rethinking our technology stack, which will then obviously have material benefits in terms of overall productivity and our scalability of our franchise so. Those are highlights from the first quarter.

On Slide 4, just overall customer segment performance. Balanced performance across all of the business segments, the real driver here has been BAWAG P.S.K Retail, really record quarter in terms of EUR 55 million of pretax profit on a year-over-year basis up 35%. If you go across the P&L be it NII, NCI positive developments, positive developments on operating expenses.

But the story around BAWAG P.S.K retail is really Concept 21 and the operational roadmap that we have in place in terms of transforming our business from an omnichannel standpoint and then really what we continue to do on the asset side and changing the overall mix focusing on consumer loans in euro housing mortgages and I will get into that.

easygroup. The story there is really we've I think indicated the burn off that takes place in terms of the international mortgage portfolio so that was down about 5% just in the first quarter alone that's something that we've anticipated but that's been offset by the PayLife acquisition in terms of fee income, as well as what you don't see is the growth in easybank, which I'll get into in terms of just a consumer and housing loans as well as easy leasing our auto leasing business.

Very strong delivery from the international business down 4% public sector we have obviously some weakness there I think we've talked about that in the past just given just the current market conditions this is kind of where you see it in terms of static overall balance sheet and you can see the developments on a year-over-year basis. And really strong performance from Südwestbank even though it's still early days as far as the EUR 11 million pretax profit contribution first quarter.

Moving on to Slide 5. If you look at BAWAG P.S.K Retail in terms of financial highlights of EUR 55 million of pretax profit up 35% year-over-year. More importantly, if you kind of parse the P&L, NII is up 4% year-over-year, NCI is up 19% year-over-year in large part driven by what we've done on the Austrian Post in terms of the reduced commission expense, as well as growth in current account fee income. And if you look at on a quarter-over-quarter basis you see 2% NII growth from 4Q '17 to the first quarter as well as about 9% NCI growth, which I think we've indicated before.

Positive operating leverage in terms of continuing to reduce the cost base, there's going to be more to come on that front, so really positive development from a financial standpoint. If you look at the overall asset mix, on the surface it's flat EUR 9.5 billion in terms of total assets, but the reality is our consumer loans are up on a net asset basis 1%, our euro mortgages are up 2%, and that's effectively offset on the downside by a reduction, a proactive reduction in our Swiss franc mortgages, which we would like to see that go away tomorrow if possible, as well as just some [ Emo ] bank assets. So balanced but we see the overall mix about 75% is consumer and housing loans, which is our core product growth that we're focusing on.

In terms of new business originations EUR 300 million for the quarter, again driven by housing and consumer loans. Really positive developments on the fee income side, a real strong adoption of our premium current account models. You can see NCI up 6% versus prior year and that's really because almost 70% adoption of our new current accounts.

More importantly this shift to digital is probably best captured in the metric of over the counter transactions, so over the counter transactions declined 2 points just from fourth quarter to first quarter. Today 88% of our over the counter or of our transactions are e-banking, mobile and self service only 12% are over the counter and we see that going to single digits at a rapid pace.

I mentioned Concept 21 this is really just a redesign in terms of our network very good developments on that front. Hiring of financial advisors that will take place over this 2-year period as well as the retail partnerships that I mentioned earlier, so really strong first quarter for BAWAG P.S.K Retail.

Moving on to the next slide, Slide 6, easygroup. EUR 32 million of pretax profit, on a year-over-year basis down 6% but this was anticipated given the fact that we have the run off in the international mortgage portfolios this is the U.K. and the French portfolio.

More importantly, if you actually look at quarter revenues they're up 20%, this is driven by the PayLife acquisition as well as the organic growth that we see across our consumer loans, our housing loans in easyleasing.

So again if you kind of break out the overall asset mix, easybank in terms of just the direct bank, their assets are up net of 6%. Kind of on the on the first quarter basis, easyleasing is up about 1% on a quarterly basis net assets and then the international mortgages are down 5%. And that's what accounts for the EUR 200 million decline in the first quarter, but we projected and communicated this over a lot of mixed development.

We had EUR 200 million of asset originations in the first quarter, a very positive development. More importantly even though they are smaller numbers, they are more indicative of in terms of just the organic developments that we see in easybank the direct bank, you see we are starting to make progress on our easy konto current accounts. That's actually up in terms of fee income of 5%, this is a current account that's not a free current account but a current account that we charge.

And really what that indicates is the fact that customers are willing to pay for a high-quality current account with high-quality service and we take a lot of pride in that. Cross-sales is actually going quite well in terms of PayLife to our existing customers up 46%, albeit on a lower base, but a positive indication.

On the next slide are non-retail segments, this is just to reiterate the international business as well as the DACH corporates and public sector lending franchise. International business had a really, really strong first quarter EUR 900 million of originations in the first quarter net asset growth of 2% driven by our corporate lending, there were some redemptions on the real estate business, but more importantly outside the 2% net asset growth, we see a really solid pipeline for the remainder of 2018. So really positive developments in terms of the international business.

Contribution of EUR 25 million of pretax profit, it's 12% on a year-over-year basis, in line with what we've expected. And most importantly the credit quality of the international business if you look at the entire portfolio in the asset composition, looks very strong versus what we saw last year.

On the DACH corporates and public sector businesses contributed EUR 14 million of pretax profit, this was down 33% versus the prior year. I think we've indicated at multiple occasions that it is a challenging overall market environment. What we see today quite frankly is pretty irrational pricing. We will only do deals on a transactional basis that makes sense from a total risk-adjusted return. So this was something that we've anticipated. Still on a pretax return on equity in terms of the overall business, it's about 17%, but we are seeing muted loan demand and the overall asset mix is pretty stable given that the redemptions on the corporate side are offset by a public sector short-term lending. So I think this is kind of where you see the business in the current environment and we will continue to be patient.

On Slide 8, Südwestbank pretax contribution of EUR 11 million in the first quarter, which is actually a really positive development, but more important than just the first quarter contribution and the EUR 300 million of asset originations that we saw in the first quarter was what's happening on the transformation front.

So I mentioned earlier on the call, we have signed the social plan with the workers' council, that took about 3 months; very solid discussions with the workers' council, we have an amicable social plan that we put in place. The execution is actually ongoing. We feel really positive in terms of the transformation and really starting to see a lot of the benefits materialize in the second half of 2018 and that will run into 2019. We put a number of initiatives in place outside of just in terms of personnel and transformation or restructuring, we have a number of bullet trains that effectively go after call it non-personnel costs or G&A and it will from a balance sheet standpoint as far as overall capital allocation, we have adopted the group policies for credit underwriting. We feel really good in terms of kind of the outlook for the business and I think first quarter is an indication of kind of where things are going for the remainder of the year.

So the key message here is social plan in place and we believe we'll start to see accelerated cost out in the second half of 2018. And as I mentioned before the targets are going to be in line with the overall group targets for BAWAG.

So with that, I'll pass it over to Enver to get into the details.

[Enver Sirucic, executive]

Thank you, Anas. So I am on Page 10 right now. I will not reiterate everything that Anas mentioned already, but I think it was a very good start into the year in terms of financial performance. I think one thing to be highlighted and I will go through that in a second on the normalization of real estate charges at this point on and if you see previously it was EUR 116 million, what we really did is just to do it on a pro rata basis very short of pro forma PBT which would then have shown EUR 142 million of PBT. And if you do the same like-for-like basis compared to last year, as shown the PBT was up 5%.

On the cost side EUR 130 million, that's the first quarter that we currently have OpEx where we see a normalized run rate, what does that mean. So it's fully including the integration of PayLife as well as Südwestbank. So that's kind of our starting point, the EUR 130 million, we will now focus of course to reduce that over the next quarters also with the implementation of the social plan at Südwestbank and you can see it in the cost income ratio, it's already below 44% which is well ahead of our plan to be below 46% for the full year.

I think at the customer segments everything was said, very strong originations that we had and also the customer balance sheet was quite stable. On the risks side, I think quite normal benign credit environment, risk cost ratio at 16 basis point, which is quite in line with what we always had between 15 and 20 currently and we said through the cycle we expect 25 basis points.

CET1 ratio at 14% full loading including the interim profit and also we reconfirmed the impact from our first line which came at 10 basis points, so gross we created 60 basis point of capital, less 10 basis point for IFRS 9 which gives you the growth from 13.5% to 14%. And in April we issued AT1, which we also said we will focus on optimizing our total capital structure with that EUR 300 million of [Technical Difficulty] we issued in April, we pretty much fulfilled the 150 basis point bucket that we have, currently it's 140 basis points, but we think we'll grow into it once the RWA density has been optimized.

On Page 11 what we wanted to show is just normalization, it's nothing unusual in the regulatory charges, so it's just a booking convention that most of the regulatory charges are booked upfront in the Q1. So what we have done, 85% which equals EUR 37 million have been booked in Q1. We expect full year charges of EUR 43 million and EUR 44 million, so normalized which means pro rata if I would do a 25% each quarter, it would have been around about EUR 11 million, so a EUR 26 million normalization, so that's how you go from EUR 116 million to EUR 142 million.

The main driver of the EUR 37 million is EUR 22 million we have for the deposit guarantee scheme, which is also booked in this segment. So you will see the EUR 22 million allocated across the segments. On the EUR 15 million the majority 3 quarters of that is the recovery solution fund, contributions that we have and the reduced bank levy as well as contributions to the -- for the regulatory bodies which is the Austrian and the ECB, that is shown in the corporate center. So on the next quarters you will see a very low regulatory charges line in the P&L.

On Page 12 just the usual overview that we have on the P&L balance sheet. I think most of the lines have been discussed, so NII up 6% mainly driven by the core performance of the retail segments, but as well of course as the integration of the acquisitions that we had.

NCI massively upwards 50%, this is really the one thing that we have is, of course, reducing the commission expense from the Austrian Post Corporation and of course the contribution from PayLife that we have seen reflected here. Other revenues quite still around that 5% that we usually have through the cycle in the last 3 years.

OpEx I mentioned that regulatory charges is the 85% that we have and risk cost the EUR 16 million which equals 16 basis points of risk to cost ratio.

I think on the balance sheet side, customer balance sheet quite stable compared to yearend, the only thing that is rather worth highlighting, combining the securities portfolio of our Südwestbank, we also decided to deleverage some of that, so it's roughly EUR 2 billion that we de-risked in the first quarter, which increases on the other side, our excess cash position.

On Page 13, in terms of core revenues. So I think that one ratio the NIM that we said it will come down as expected is because we now also included the business from Südwestbank that has a lower NIM, so that kind of dilutes the overall NIM for the group, at 2.15%. I would expect the 2.15% to be a good proxy going forward because we are now kind of on a normalized run rate basis. On NII, it's really what I said, core business is contributing and as well the acquisitions of the NCI is the reduction of Austrian Post which is roughly 75% to 80% lower than compared to Q1 last year, and of course the integration of PayLife and Südwestbank, but also good performance on the current accounts and [indiscernible].

On Page 14, OpEx, I think really the one thing, see the EUR 130 million is the starting point for the year, the social plan is now being put in place at Südwestbank, it will take time that you really see the effects, but you should be seeing the effects in the second half on a run rate basis as we also report Südwestbank independently and of course we continue to focus on efficiency, not only in Südwestbank, but across the group. So we are very confident that we will meet or probably be better than our targets here.

Risk costs, Page 15, nothing really to highlight, very good performance in terms of NPL ratios, coverage ratio is very stable, risk cost ratio is 16 bps as I said and this is really if you just look at the segments, it is just the normal run rate that we have in the regional segment and quite benign present environment in the corporate segment, it didn't really have any moves there.

On Page 16, capital, so we have 2 pages on capital prepared, the one is just to show the development going from 13.5% to 14% I think 2 elements I would mention here is the risk weighted assets came down along with balance sheet 2% and the second one still RWA density is at 47%. Please keep in mind this does not include yet the optimization that we plan to do on the mortgage portfolios in France so this is not reflected in the numbers and we are still working on that.

On Page 17 we prepared a walk of the CET1 and also the total capital ratio to show pro forma after the AT1 issuance, on the CET1 development the story is really organic generation was 60 bps which is in line what we said in the previous quarters so for full year it is around about 2.5 percentage points, organic origination adverse impact was reconfirmed at 10 basis points that gives you the increase of 50 bps. The pro forma dividend, our dividend policy at 50% payout if you would include that that would reduce the CET1 ratio from 14% to 13.8%. The prudential filter that we mentioned stood at 20 bps if you remember from Q4 is not considered here. So this is something that would be a release once we close the PPA off Südwestbank as well.

On the total capital so what we are trying is just to optimize the total capital package as well with the AT1 issuance you will see that we are pretty much there in terms of Tier 1. In terms of total capital we are still looking in optimizing the Tier 2 structure and probably more to follow on in the next quarters, we will keep you updated.

On Page 18, this is just normal update on funding, nothing really changed, we just even more shift to customer funding, so customer deposit funding is in the meanwhile almost 70% of our total funding, everything else is pretty much unchanged, leverage very healthy yes, improving in line with the CET1 ratio.

One page or one information that we wanted to share with you this quarter on Page 19 because we got a couple of questions over the last couple of earnings calls is on MREL, unfortunately we cannot really tell you what the precise result will be and how much we put, to give you a bit of a guidance, and so we prepared a bit of a retention profile also our on issues funding [ that ] and we think in '19 we will really know or end of 2018, early '19 we will know the requirement but we think we will most likely issue EUR 500 million of non-preferred in '19 but of course depends on the final targets that we will receive. With that I would hand back to Anas, thank you.

[Anas Abuzaakouk, executive]

Thanks, Enver. So just to wrap up here, very strong start for 2018 we feel really confident in terms of meeting or exceeding our 2018 targets, the operational developments that I had mentioned earlier in terms of Concept 21 we feel really good about, very strong pipeline in the international lending business, so we feel good about that. A number of initiatives that we will hopefully address in the quarters to come around operations and technology, which we think will be productivity drivers. A very robust M&A pipeline, obviously, we can't comment on any specific deal but we feel pretty good about what we have in the pipeline. And we feel good about how 2018 looks in terms of overall performance. So with that, I think, operator, we will take questions.

[Operator]

Ladies and gentlemen at this time we will begin the question-and-answer session [Operator Instructions]. The first question comes from the line of Anna Marshall of JP Morgan.

[Anna Marshall, analyst]

A couple of questions from my side, please. First one on Südwestbank, could you provide a bit more color please on the restructuring measures that you are taking and specifically on the social side. For example the scale of staff and branch reductions and the scale of resulting cost savings? And also kind of your overall experience that you have mentioned that you have achieved the negotiations basically you concluded in 3 months so that sounds quite good but overall kind of how has experience gone for you, what has been better, what has been worse than expected, any major differences during this -- in Germany versus your experience in Austria. So that was the first question and the second question on the capital please, can I just clarify that the for the measures planned for 2018 in terms of optimization is that only related to French mortgage portfolios or any other portfolios?

[Anas Abuzaakouk, executive]

I will take the Südwestbank and I think Enver you want to take the mortgage portfolio. So, and just jump in here if I didn’t complete the -- answer all the questions that you had. For Südwestbank the restart by thanking the workers' council, so right when we close in middle of December of last year we initiated discussions with the heads of the workers' council and I would say 3, 3.5 months is actually pretty accelerated, they were incredibly constructive in working to a transformation plan, understanding the need that part of the turnaround of Südwestbank to make sure that we address the return targets that we had underwritten to or met and that we all understood that this was something that we wanted to do in an expedited fashion and that did not hang over the organization for months on end, so really appreciate working with the workers' council. Dr. Wolfgang Kuhn who is the CEO of Südwestbank did a great job with the team supporting him really in working through those negotiations I think we struck a balanced deal which was a win-win for both the workers' council as well as for management. And the most important thing for us, Anna, was to be able to accelerate the transformation and restructuring and not have this hang over the bank for an extended period of time. We don't give guidance in terms of the total number of FTE or the specific costs but what I can guide you to Anna is, if you look at the BAWAG transformation from 2012 to 2016 in terms of that 5-year [ built ] for scale of cost out that we experienced within BAWAG P.S.K which is pretty transformative and that was something that hopefully we will be able to materialize over the next 18 months. Enver mentioned that you will see run rate impacts in the third and fourth quarter of this year and that obviously we will carry into 2019 so we are really positive in terms of the developments on Südwestbank and really appreciative of the constructive nature with the workers' council and the management team did a great job led by Dr. Kuhn. As far as the overall experiences versus Austria it is more a prescriptive in Germany versus Austria but this was something that we were aware of. We don't give the specifics in terms of the overall payback that each individual kind of comes out to because it is on a tier basis in terms of overall payback or restructuring but it's -- the EUR 42 million that we had booked in restructuring reserves for last year as part of the overall PPA will be more than sufficient to address the full restructuring that we are looking to undertake. I think -- was there anything else than Südwestbank that you had asked or -- I think I covered that. Maybe the mortgage…

[Enver Sirucic, executive]

Yes on capital optimization you mentioned the French mortgage first of all this is something that we plan to do this year, the other element on optimizing the capital ratio is what I said is also will be the relief of the prudential filter that we have which is roughly 20 basis points because we will finalize then the PPA within the 12 months window, which will then fall in 2018. And of course something that we don't really focus on a year-by-year basis but more mid-term is just the overall RWA density which means also further [ RB ] rollouts since we are going through with our regulators this will be a midterm that we go from 47% -- we always had, we think it is going to be between 40% and 45% the right ratio for us.

[Operator]

The next question comes from the line of Pawel Dziedzic of Goldman Sachs.

[Pawel Dziedzic, analyst]

So the first one will be just a follow up on your cost targets for Südwestbank and I appreciate you don't want to give too many details, but can you update us maybe on what your expectations are for of cost to income, it's at a little bit over 60% now, where would you ideally like it to be and to what extent it is driven truly by the cost reduction and to what extent can you bring it down by increasing revenues, so that would be the first, and a follow up question. Then on your NII more specifically this quarter, I was wondering to what extent this EUR [ 208 ] million figure reported is a good run rate for the rest of the year, you mentioned that margin should be relatively stable at EUR 215 million going forward but there are a few things if you look at the results that perhaps might distort it a little bit. So if I look at DACH corporate market it seems that the NII there is down quite sharply, so maybe you can comment what happened and what is your outlook there and also just on the corporate centre there is I think around EUR 11 million negative NII booked there and it is a good run rate in general.

[Anas Abuzaakouk, executive]

Very good questions. I'll take the Südwestbank and Enver will address the NII questions. So Südwestbank; we don’t give this specifics in terms of FTE or personnel costs or G&A but I can tell you look it's 61% it-- the cost income ratio will be in line with the overall group targets right so you see us today at 43%, 44%; we've communicated that we will be under 40% I think you can think of Südwestbank in that overall context. You mentioned in terms of how much of the interplay between cost and revenue, when we do our targets we kind of we put the operational plan in place, we assume there're no lift from revenues, so that will be pretty static and even potentially slightly declining just given just the overall mix that we have. So this will be true cost out in terms of getting to those ratios but we felt pretty good in terms of the transformation plan that we have in place and addressing the personnel as well the non-personnel cost. And I think you'll start to see that in the second half really start to materialize and obviously that will work into 2019. I think that was the Südwestbank and -- if you want to take that.

[Enver Sirucic, executive]

So on the NII, yes DACH corporates we have seen a decrease, I mean compared to Q4 it's EUR 1.5 million decrease in DACH and it has more than offset by the retail segments that we are seeing on the corporate sector. I think the overall-- if you look at the balance sheet composition what we are seeing, we also got excess liquidity with the acquisition of Südwestbank and also now with the derisking of the bonds and the other side just our excess cash position is quite significant, which also means we have a negative carry at this stage on under the corporate centre, this is something that I think every bank has to live with. And we made also a conscious decision to solve some of the bonds just given the risk returns were not right for us but this is the main driver behind it.

[Pawel Dziedzic, analyst]

So let's say Q1 run-rate for NII is a good proxy for the rest of the year is that correct, it does affect you?

[Enver Sirucic, executive]

Yes, I would assume that of course we have a bit different days with February and so on but generally it’s a good proxy.

[Pawel Dziedzic, analyst]

And can I then ask one follow-up question? So you are guiding for over EUR 600 million PBT for the full year on the normalized number you tell us it's your EUR 140 million. So where would that pick up come from if lets say NII is stable and that’s the bulk of your revenues and do you think that the uplift there costs the comps on the cost side purely on perhaps on the initiatives that you already have in place in Südwestbank; is there something that you can do on a cost of risk, where do you see the most opportunity to beat or exceed the EUR 600 million PBT.

[Anas Abuzaakouk, executive]

Hi, Pablo just I think clarified the greater than EUR 600 million we have said by 2020 for this year 2018 the PBT target is greater than 5% growth from EUR 517 million right so that's -- just not to mix the '18 versus the '20. We are conservative by the way when we put out the targets I felt that’s where you were going with the question, but look -- just the answer I think Enver talked about the NII stabilization that we are making a conscious decision to keep the cash in that negative period to be patient for better opportunities and to lend responsibly and in a disciplined way. And exactly to your point a lot of it will come through operating leverage or cost out that we have planned in the second half. In addition to some initiatives around fee income that we have planned so. Does that answer your question?

[Pawel Dziedzic, analyst]

Yes, that does answer my question.

[Operator]

The next question comes from the line of Julia Matoshchuk of Morgan Stanley.

[Julia Matoshchuk, analyst]

A couple of questions from me as well so the first one is on the international business segment. So you mentioned a solid pipeline for the remainder of the year, I was wondering would this be possible to get a little bit more detail on this pipeline, obviously, I don’t want comments on specific deals but just in general perhaps rating or asset class or geography, I think that will be very helpful. And then so the second question is on DACH and the corporates and public sector. You mentioned irrational pricing and a lot of competition on this segment. I was wondering do you see this changing or either anything that could lead to changes here and if the answer is no then shouldn’t we be assuming constant pressure on the core revenues in this segment going forward.

[Anas Abuzaakouk, executive]

Very good questions let me take the take the first one in terms of the international business, you are right we can't give the specifics but I think at least I can give you a sense of where the pipeline is developing. It's more a western Europe; its portfolio and PL financing I think that we've talked about in the past; Spain as well, we have a pretty good pipeline. We feel good because we actually entered into transactions and it just hasn’t funded yet so that’s why I think we have a good forecast for 2018 but a very good development on that front. And more importantly, we don’t look at it in terms of the risk class but these are all, when we look at the underwriting guidelines and just the LTB's and LTC's very solid underwriting on all of these deals. So we feel really good in terms of the asset quality as well as just the potential net asset growth as you see kind of in the subsequent quarters. That’s on the international business and what was the question that.

[Enver Sirucic, executive]

The DACH.

[Anas Abuzaakouk, executive]

Yes, the DACH. Julia we were hopefully I think we have been saying this for a couple of years that we are going to be patient and hopefully there is going to be more rational pricing; I got, to be honest, we don’t really see that taking place but what we have done in terms of our 3 year forecast as well our forecast for 2018 is assume things are pretty static to slightly declining. So you'll start see a-- continue to see margin compression, and I think what you see in the first quarter is probably indicative or reflective of what you will see for the full year. So you won't see the drop year-over-year. I think it's more a pretty static as to what you see in the first quarter. But the opportunities unfortunately we don’t see the type of opportunities that we see in other business segments which is why you'll see the shift more to a retail in international as opposed to DACH corporates, so.

[Operator]

The next questions come from Gabor Kemeny of Autonomous Research.

[Gabor Kemeny, analyst]

A couple of quick question. The first in Austrian consumer lending; are you still getting market share? Because you have gained quite significant market shares in previous years, how do you see the competitive situation and margins developing in Austrian consumer lending? And secondly, on the regulatory charges where you have an increase this year is this related to the acquisitions and shall we consider this for a -- this as a kind of run rate going forward?

[Anas Abuzaakouk, executive]

Hi Gabriel, thanks for the questions. Let me just make sure I got -- so the first question was on market share development the second was the nature of the regulatory charges if these are one-off or are these more recurring.

[Gabor Kemeny, analyst]

So the Austrian consumer lending was the first one yes, and the second one is whether the regulatory charges were related to [indiscernible] increasing balances.

[Anas Abuzaakouk, executive]

You want to go?

[Enver Sirucic, executive]

Sure. So maybe the regulatory charges that part is yes one bigger part is related just to Südwestbank so with the increase in balance sheet also higher regulatory charges, there are no modified items so if you look at the 37 we had 22 in deposit guarantee scheme. This is purely just based on your customer deposit and then resolution was 3 quarters of the remaining 15 and then you have 4 on that and so I think and 1 on the charges but it is really just related to balance sheet no real changes in the…

[Anas Abuzaakouk, executive]

And related to the acquisitions.

[Enver Sirucic, executive]

And of course with the acquisitions we…

[Anas Abuzaakouk, executive]

And then as far as the market share Gabriel the -- pretty flat in terms of first quarter when you think about the core products that I mentioned consumer loans and housing, what -- consumer loans is net asset growth of 1% in the first quarter and mortgages is about 2%, so probably in line with the market slightly below where the market is but we are just trying to be disciplined in terms of what we are doing on the consumer lending front just the -- as far as overall underwriting guidelines and not chase the market so.

[Gabor Kemeny, analyst]

Okay, and what sort of growth rate do you -- would you look at in Austrian consumer lending is Q1 a good proxy for the coming quarters?

[Anas Abuzaakouk, executive]

Yes, I think you can Q1 as a good proxy, yes.

[Operator]

The next question comes from the line of [ Matthew Nemes ] of UBS.

[Gabor Kemeny, analyst]

I have a question on NCI; actually 2 small piece after that. Is the full effect of the reduced commission expenses to the Austrian cost already in these numbers or is there anything incremental coming from that source? And secondly, if you see that give us a little bit more color what would you expect in terms of PayLife revenue synergies or PayLife additional contribution to NCI and then -- in quarters, so any color on what's your expectation for the remaining 3 quarters of the year at NCI that would be helpful.

[Enver Sirucic, executive]

So in the first [ question ] the reduction year-over-year was roughly 75%. So if you look at it in the first quarter last year, we had a commission expense it was around EUR 12 million, now it's around EUR 3 million that we had in the first quarter. There is still some remaining parts because it's shown in the separation also we are using [indiscernible] of the services which will go down on the commissioning expense side, yes, so that is expect, but also to be fair what we said in Q4, where we booked most of the expenses for that is also we are building up our franchise this will generate a bit higher OpEx that should probably offset each other. And I think on PayLife the question was just on the NCI, I think and also around -- I mean we are ahead of plan integration of PayLife generally, so what we have done is just [Technical Difficulty] to get easybank and also what we are bundling now is the credit card production, the call center. I think a lot of synergies that we generated already in the first couple of months that was planned just to be done in the first 12 months. So that's quite good. And in terms of NCI contribution, this is also a bit ahead of plan than what we said. I think we highlight that contribution will around EUR 12 million from the PayLife business, which is purely NCI at the end or the PBT contribution. This will be probably a bit higher than what we said in Q4.

[Operator]

Next question comes from the line of Simon Nellis of Citibank.

[Simon Nellis, analyst]

First question would just be on the margin. I see from the file that you sent up that the NIM in the BAWAG Retail division actually went up by around 9 basis points over the quarter. I'm wondering if there is anything going on, is that on the sustainable level? Also just on your divisional accounts I see that you restated them. Seems that the risk-weighted assets have gone and have changed, just wondering if you could give me an indication of what's going on, why you restated backwards at least the balance sheet for your divisions?

[Anas Abuzaakouk, executive]

I think it is [indiscernible]

[Enver Sirucic, executive]

Yes, I think maybe the last question, Simon, so what we [indiscernible] just the resegmentation, that's why we also wanted to provide you a full history of the data, is we moved startups like I said business from retail 2 years ago, that's why you'll see the results it is not really a restatement, we just wanted to show that clean shift to present…

[Anas Abuzaakouk, executive]

Well, we decided on the easygroup versus BAWAG P.S.K Retail. We shifted all of the non-branch origination businesses so that's easygroup -- or easybank, easyleasing, easypay and Deutscher Bausparkasse which is really through brokers and retail and banking partner relationships, that's all under [ Sascha ] who runs easygroup and BAWAG P.S.K is our traditional omni channel for the BAWAG P.S.K customers. So that's the shift.

[Simon Nellis, analyst]

Right got it.

[Anas Abuzaakouk, executive]

I think on the NII, that's really driven by 2 things as it relates to BAWAG PSK, that's the continued mix, so I know it's small and incremental in terms of actual numbers, but if you look at the mix of assets in the EUR 9.5 billion, it goes from just quarter-over-quarter from 74% which is consumer loans, euro mortgages to 75%, but then if you look at it over kind of 5 quarter trend, that mix continues to develop in the right direction. So you have higher margin consumer loans, higher margin euro mortgages, a reduction in FX mortgages, the Swiss franc mortgages, that continues as well as the liability optimization. So I think we talked about the retail deposits going from 17 basis points down to 12 basis points. So all of that factors into I think you mentioned a 9 basis point increase in the NIM in that segments.

[Simon Nellis, analyst]

And will that continue then?

[Anas Abuzaakouk, executive]

Yes, that should continue, yes.

[Simon Nellis, analyst]

Right. And then maybe just 2 other quick things. I think the French mortgage book was EUR 1.1 billion, is that right? What's the risk weight on that again?

[Enver Sirucic, executive]

It's the 140% roughly…

[Simon Nellis, analyst]

140%?

[Enver Sirucic, executive]

Yes.

[Simon Nellis, analyst]

Right, and then just last on the status of [ click ], I don't think you've launched it in Germany, what that means for consumer loan origination in Germany, it is just the kind of reduced your expectations. I think you were targeting about EUR 400 million in originating --

[Anas Abuzaakouk, executive]

Yes so Simon -- absolutely, that was more of a 2020, I think it was a multi-year our 3-year outlook I guess. When we talked about the overall consumer loan market share, online consumer market share. What we've done on click is we postponed the actual launch, probably till second half of this year given that what we wanted to do is have an integrated technology platform that accounts for Südwestbank, that accounts for Deutscher Ring so any effectively retail product as well as the click consumer loan that we want to launch through easygroup to be able to have one effectively front-end tool in integrated processes across all of our acquisitions or platforms. In that also whatever technology that we put in place for future acquisitions we can scale up. So we made a conscious decision to delay that, I think we mentioned it in the fourth quarter. It's probably going to be more of a fourth quarter event now in terms of the actual launch, but we want to have something that's integrated that we can actually scale up across different platforms.

[Simon Nellis, analyst]

Does that mean that you're kind of pushing out your volume target?

[Anas Abuzaakouk, executive]

I think we are pretty conservative in terms of the volume target by 2020, so I think we're not too concerned in terms of where the overall volume for consumer loans will end up. If you look at it on a multi-year basis, but we have done that purpose [Technical Difficulty] in terms of being disciplined as far as the asset growth.

[Operator]

Next question comes from the line of Victoria Cherevach, Bank of America.

[Victoria Cherevach, analyst]

Thanks very much for taking my questions. I have 3, the first one is, if I'm not mistaken, the new business originations doubled in the international business year-on-year. Is this primarily from an increase in NPL financing? And my second question is about the margin guidance that you're giving. I think you said that you plan for to stay at around 215 bps. You should get some upside from moving into consumer so that should help your NIM and so where do you see the biggest drag? And my third question is whether you have any change to your tax spend guidance now that you had more time with Südwestbank, you've seen that you've gone in and just what you're thinking now about technology?

[Anas Abuzaakouk, executive]

I'll take the tax and I guess you want to take the other question then.

[Enver Sirucic, executive]

Sure.

[Anas Abuzaakouk, executive]

So the tax spend, we've mentioned last year, I think we spent total of EUR 80 million cash, which is a combination of OpEx and CapEx. I don't think that's any different as we kind of look at 2018, what we're more focused on Victoria is making sure that we, over the long haul optimize that total cash spend right, in making sure that we have a scalable platform as we go cross border in are able to adapt a lot of the new digital products in a way that will differentiate us from our competitors so, but we don't give any specific guidance on the overall tax spend, but there will be a number of productivity measures, which I guess you can say we put into the overall under 40% cost income ratio for the group that we've communicated.

[Enver Sirucic, executive]

I think the other one was origination levels of [ IB ]. Yes, I think we just had a very strong quarter in Q1 and also looking at quarterly numbers is not really reflecting the full year development because sometimes just some funding gets into the next quarter but we had a very strong quarter, in terms of asset mix, really unchanged and it was not only driven by NPL financing so still the rule of thumb that we have 25% of our overall IB lending is NPL financing, that hasn't really changed.

[Anas Abuzaakouk, executive]

I would say, Victoria, on the NPL financing, it's more in the later quarters versus in the first quarter, it was more on the corporate lending side.

[Victoria Cherevach, analyst]

Right, okay. That's where you see the biggest pipeline sort of for the coming quarter.

[Anas Abuzaakouk, executive]

Yes, exactly.

[Victoria Cherevach, analyst]

Okay, got it.

[Anas Abuzaakouk, executive]

But that did not -- that was not in the EUR 900 million that Enver mentioned. That was predominantly not the NPL financing, that will come in subsequent quarters.

[Enver Sirucic, executive]

And I think you mentioned also NIM of 215 bps so if the asset mix is improving [Technical Difficulty] just the excess liquidity that we have with the negative carry on the one side and also we have, if you look at our liquidity portfolio which is mainly the securities portfolio, you see, of course, pressure on the rate side, that's where it's coming from.

[Operator]

The next question comes from the line of Marcell Houben of Credit Suisse.

[Marcell Houben, analyst]

Thank you for the presentation for taking my question. Just 3 left if I may, the first one is on the OpEx, particularly in the BAWAG Retail, which was pretty strong this quarter. Do you expect more cost savings through the rest of the year, is it sort of the starting point, the OpEx for BAWAG Retail, the same accounts of easygroup, also very strong costs, how do you expect that for the rest of the year. That was the first question. The second on the M&A front, I believe the press last year stated about the [ HSA ] stake from BAWAG. Can you just give comments on the -- or give some color about the rationale about the stake and perhaps a P&L or capital impact. And I guess the last one on the AT1 issuance, how should we account for this, does [ D&I ] costs goes through the corporate center or do you allocate it through the segments?

[Enver Sirucic, executive]

Okay, I think the first one was OpEx for retail in easygroup. Yes, I think it's fair assumption that this is the run rate that we have in the segments. On M&A and HSA I think HSA there is not really a lot to comment on, so yes, it's the 2.5% that we participate in closing still expected I think for the second half…

[Marcell Houben, analyst]

You are saying the capital impact--

[Anas Abuzaakouk, executive]

The capital [indiscernible].

[Anas Abuzaakouk, executive]

Under -- Marcel under 10 basis points [indiscernible]

[Enver Sirucic, executive]

And the AT1 issuance will be presented in the corporate center because it will go as a dividend which is then shown in the corporate center, it will not impact the business segments.

[Marcell Houben, analyst]

Excellent, thank you.

[Operator]

There are no further questions at this time. I hand back to Anas Abuzaakouk for any closing statements.

[Anas Abuzaakouk, executive]

Thank you, Operator. Thanks, everyone, for joining. Look forward to catching up in the second quarter earnings call, appreciate all the questions. Take care and have a nice day.

[Operator]

Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.