BAWAG Group AG

VSE:BG

Earnings Call Transcript 2019-Q2

[Operator]

Good day, ladies and gentlemen, and welcome to BAWAG Group Q2 2019 Results Call. [Operator Instructions] As a reminder, this conference is being recorded and a replay as well as a transcript thereof will be available on BAWAG Group's website.

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, and thank you for joining our second quarter earnings call. As usual, I'm joined this morning by Enver, our CFO. So let's get right into it.

On Slide 3, we had a strong second quarter delivering net profit of EUR 122 million and an earnings per share of EUR 1.23, up 4% and 6%, respectively versus the prior year, delivering return on tangible common equity of 15.3% for the quarter.

On a half-year basis, we delivered net profit of EUR 219 million and an earnings per share of EUR 2.21, up 8% and 9%, respectively versus the prior year and a return on tangible common equity of 13.8%. The fundamentals of the bank remained very strong. On a pro forma basis, which spreads the regulatory costs evenly across the year and accounts for our proposed capital actions, our return on tangible common equity was 17.8%. We're on track to deliver on all of our targets in 2019 as we continue to adapt to the changing operating environment and focus on the things that we can control.

In addition to a strong set of earnings this quarter, it's been a successful quarter in advancing our strategic goals. We closed on our leasing and factoring acquisitions that we signed last December, and continued to make progress across various operational and strategic initiatives. To date, we've made very good progress delivering on Concept 21, wrapping up our retail partnerships as well as building out our German platform. Our various operational and strategic initiatives are focused on transforming the business to a greater Retail and SME orientation across the DACH region.

In terms of capital generation, we generated 60 basis points of gross capital during the quarter and increased our CET1 ratio by 20 basis points to 15.1%. This is after accounting for the closing of BFL Leasing and Health AG. We're also on track with our capital distribution plans. On April 30, the AGM approved our proposed share buyback program of up to EUR 400 million. We filed our regulatory applications thereafter with the regulatory approval process ongoing. We've had very good dialogue with our regulators and expect this to be finalized in the second half of the year. In parallel, we are reviewing a variety of execution options and making the necessary preparations for undertaking our share buyback program during the second half of the year.

We've also paid a dividend of EUR 215 million this past May, which represents 50% of the 2018 attributable net profit and are reaffirming our dividend policy of 50% of net attributable profit for 2019.

All right, moving on to Slide 4, a strong second quarter in terms of financial performance. Our reported profit before tax was EUR 160 million, up 5% versus the prior year. This was driven by higher operating income, offset by higher expenses due primarily to the closing of the recent acquisitions. The reported return on tangible common equity came in at 15.3% with the cost-income ratio of 43.5%.

For the half year, our profit before tax was EUR 287 million, up 6% versus the prior year. The reported return on tangible common equity was 13.8% with the cost-income ratio of 42.9%, in line with our full year target of under 43%.

On a pro forma basis, the return on tangible common equity was 17.8%, in line with our stated target range of 15% to 20% for the year. Additionally, the CET1 ratio rose to 15.1%, again on a pro forma basis, our CET1 ratio would be 12.7%, again, within our stated range of 12% to 13%.

All right, moving on to Slide 5. Capital development. At the second quarter -- at the end of the second quarter, our fully loaded CET1 ratio was 15.1%. We generated 60 basis points of gross capital, partly offset by the impact of the closing of the leasing and factoring acquisitions, resulting in a net capital generation of 20 basis points. Incorporating the proposed share buyback of EUR 400 million and the dividend accrual for the first half of 2019, we'd have a pro forma CET1 ratio of 12.7%, in line with our target range.

We believe our pro forma return on tangible common equity provides a more accurate picture of our underlying profitability, reflecting our go-forward capital base following the return of capital that we have earmarked for distribution to shareholders.

We're fortunate that we have a very strong capital generating business, which provides us with a variety of options allowing us to grow organically as well as inorganically, in addition to returning capital to our shareholders. We reaffirm our annual dividend distribution policy is for 50% payout ratio of attributable net profit. To the extent we generate excess capital and are unable to deploy such capital through growth measures, we will distribute capital back to our shareholders. We will always strive to be good stewards of capital, ensuring we deploy capital sensibly and meeting our return thresholds of over 15% return on tangible common equity.

This holds true today more than ever, given the challenges faced by banks across Europe in the overall macroeconomic environment. Being good stewards of capital, maintaining our conservative underwriting standards, not chasing bad volume, not chasing bad deals, driving profitable growth and focusing on the things that we can control through self-help, we believe differentiates our approach and positions us to win over the long term.

All right, moving on to Slide 6. The Retail & SME division. Our Retail & SME business delivered net profit of EUR 76 million in the second quarter, return on tangible common equity of 22% and a cost-income ratio of 45%. Net asset growth was 3% versus prior quarter and up 4% versus prior year, driven in large part by the leasing and factoring acquisitions captured in the consumer and SME business as well as the housing loans growth.

Customer deposits were up 2% versus prior year, prior quarter and prior year. The run-up of our different mortgage portfolios is in line with our projections.

Overall, core revenues were up 4% versus the prior quarter driven by NII growth, which was offset by slightly declining fee income. Operating expenses increased by 13% versus prior quarter, however, this is primarily driven by the recently absorbed acquisitions. We expect the cost-income ratio will be under 42% in 2020 for the segment, reflecting a combination of the integration efforts of our various German acquisitions, Concept 21 being completed by the end of 2019 and further operational initiatives underway to continue to drive synergies across the group.

Credit and asset quality remain strong across the business with an NPL ratio of 1.9%, which is down 10 basis points from the prior quarter and a risk cost ratio of 40 basis points for the quarter.

All right, moving on to Slide 7. Various operational and strategic initiatives across the Retail & SME business. We continue to execute on a number of initiatives while pursuing new growth opportunities, which has been consistent throughout the years. Our various operational and strategic initiatives are focused on transforming the business to a greater Retail and SME orientation across the DACH region. We see a good pipeline of bolt-on acquisitions, but at times -- but at the same time, we always continue to be disciplined. Any acquisition must meet our return target of over 15% return on tangible common equity post-transformation, as well as providing the right fit at the right value.

In our core Austrian franchise, we continue to make very good progress with our retail transformation. On Concept 21, our branch network has been reinvented to focus on high-quality advisory experience, an upgraded salesforce, simple and efficient transactional businesses and an overall enhanced customer experience. As of June 2019, 60% of our customer ships to new branches were successfully completed with the retention of approximately 95%.

We've hired over EUR 160 new advisers and opened 14 new fully redesigned branches, with an additional 50 new branches planned for the second half of this year. Based on the positive customer experience, evolving customer trends, our rollout of digital products and ramp-up of partnerships for new customer growth, we anticipate our target retail network will be approximately 90 branches as we continue to look for the future and transform our Austria and retail network.

We've also seen early benefits of our retail partnerships, driving new customer growth to our platform with core products and a seamless customer experience through enhanced digital offerings across our multi-channel platform. As the only bank partner of the newly founded and largest Austrian jö customer loyalty club, which brings together the largest Austrian retailers, including the REWE Group with 3 million users since the launch in May and a plan for approximately 4 million users by the end of the year, we bring incremental financial value for each jö affiliate transaction made by our customers.

Additionally, our exclusive long-term partnerships with leading Austrian retailers such as MediaMarktSaturn Austria continue to ramp up, with full deployment across all outlets in Austria as well as the online web shop.

To date, we've attracted over 20,000 new customers. This will allow us to optimize the personalization of our offerings and provide our customers the products and services that they want in value. We've also released a number of digital products that have been in development in the past 18 months. Introducing our point-of-sale finance product with retailers, revamping our mobile banking app klar in Austria, enhancing our SME offering through a simple online product and service offering through integrated technology partnerships, investing in roboadvisory capabilities through Savity and rolling out our German consumer loan Qlick. The focus across the DACH region is continuing to roll out digital products across all brands and channels. The goal really is to create an easy-to-use, easy-to-understand and transparent digital product designed to meet our customers' needs, while creating a seamless and efficient middle and back office.

Our DACH growth strategy has always progressed -- has also progressed through the Südwestbank and start:bausparkasse transformations. The momentum from 2018 has continued during the first half of 2019 and more importantly, we are looking to grow through new products and channels across Germany and Switzerland.

With the additions of the leasing and factoring businesses, which we consider specialty finance products, we're in the process of setting up our German platform to continue to drive operating leverage and benefit from group life synergies. We're now beginning to fully leverage our multi-channel DACH platform from branches to brokers to partners to digital products. This means leveraging Südwestbank's banking platform and branch network to drive retail, SME and private banking, leveraging Qlick to develop direct banking capabilities and working with retail partners across all of Germany, expanding the niche leasing and factoring products across our broader SME customer base in the DACH region, leveraging technology across the group and centralizing specific central functions in middle and back-office activities to establish a highly efficient platform.

In Germany and Switzerland, the focus will continue to be on multiple integration activities designed to create a focused Retail and SME platform, providing specific products, leveraging digital capabilities, growing through partnerships and continue to assess strategic M&A bolt-on opportunities to help build out our Retail and SME franchise.

Moving on to Slide 8 in our Corporates & Public sector segment. The business delivered net profit of EUR 36 million during the second quarter, the return on tangible common equity of 13% and a cost-income ratio of 36%. Net asset growth was 2% versus the prior quarter and down 3% versus the prior year, driven in large part by growth in asset-backed lending, which was offset by declines in corporate and public sector lending. Core revenues were down 6% quarter-over-quarter, mainly due to lower NII, which primarily reflected the impact of higher redemptions and refinancings in the corporate lending space. This was partially offset by lower cost, which fell 5% versus prior quarter and 14% versus prior year quarter as we continue to drive operating efficiencies across the business.

The cost-income ratio of 36% slightly increased versus the prior quarter and improved 4 percentage points compared to prior year. Credit and asset quality remained strong with an NPL ratio of 1.2%, down 10 basis points from the prior quarter and positive risk cost. We have been and will continue to be disciplined as it relates to growth, never overextending ourselves, focusing on risk-adjusted returns and always taking a conservative approach to credit before anything else. We believe we are in the late stages of a credit cycle and the whole management team remains vigilant in assessing and pricing risk.

When underwriting transactions, we base our loss analysis on through-the-cycle credit losses and idiosyncratic risks, not merely just relying on current loan losses that are a result of a benign credit environment and truly not a reflection of the credit fundamentals of the business. We've stayed committed to our disciplined underwriting approach, focusing on senior secured lending, day 1 average LTVs of under 65%, and maintaining interest covered ratio of greater than 2x.

As such has been the case for several quarters, we continue to see pricing pressure across the corporate lending space. We will remain focused on assessing financing transactions based on risk-adjusted returns that make sense and will not chase volumes or put on unprofitable business. We believe being patient and disciplined will pay off over the long time -- over the long period. Conversely, we continue to see good opportunities in asset-backed lending with a solid pipeline of opportunities ahead of us. With that, I'll turn it over to Enver.

[Enver Sirucic, executive]

Thank you, Anas. Continuing on Slide 10, we delivered a strong second quarter with profit before tax of EUR 160 million, which is up 5% versus the prior year. On a normalized basis, which spreads the regulatory cost evenly across the year, profit before tax would be at EUR 153 million and net profit at EUR 116 million. EPS on this normalized basis was EUR 1.18 per share for the quarter and EUR 2.34 for half year, up 6% and 7%, respectively.

Core revenues improved 1% versus the prior quarter, and 6% versus prior year with net interest margin improving by 4 basis points to 2.3%. Total operating income increased 5% versus prior quarter, driven in large part by the sale of securities as we optimize our overall securities portfolio.

Operating expenses increased 8% versus prior quarter, primarily reflecting our new acquisitions with integration has begun, and we fully expect to complete it over the next 12 to 18 months as well as a very small impact. The cost-income ratio during the second quarter was 43.5% and 42.9% for half year. We are confident, we'll deliver on our full year target of under 43% as we realize benefits on multiple group efficiency measures, Concept 21 and progress the transformation of recent acquisitions. Risk costs remain at a low-level with risk cost ratio of 16 basis points on the lower end of the 15 to 25 basis points guidance range and 14 basis points for the half year. All figures are in line with our full year targets.

Moving on to Slide 11, an analysis of our balance sheet. Customer loans were up 2% versus year-end with customer deposits flat. Given the current macroeconomic interest-rate environment, our focus during the quarter was further optimizing the overall balance sheet. This entails an early repayment of the majority of the TLTRO II, optimizing the securities portfolio and continuing to grow our customer business and looking to take advantage of the favorable long-term funding environment. We have also completed our capital optimization program issuing EUR 400 million of Tier 2 capital earlier this year on the back of the Tier 2 tender and additional Tier 1 issuance in 2018. Risk-weighted assets were up 1% versus prior quarter, reflecting our recent acquisitions. The leverage ratio increased 40 basis points to a very healthy 7.4%.

On Slide 12, we saw a stable development of core revenues in the second quarter, core revenues were up 1% versus prior quarter and up 6% versus prior year. Net interest income was up 3% versus prior quarter and up 9% versus the prior year, driven in large part by the recent acquisitions, core retail product growth and the overall balance sheet optimization measures, primarily reducing excess cash balance offset by the forecast of our recently issued Tier 2 capital in March of this year.

The second quarter 2019 net interest margin increased 4 basis points during the quarter and 15 basis points from the prior year quarter to 2.3% reflecting the shifting asset composition towards Retail and SME, core retail products of consumer mortgage leasing and factoring. Customer loans and interest-bearing assets grew 3% year-on-year. Net commission income was down 3% versus the prior quarter and 2% versus prior year. This was primarily driven by lower income in Corporates and Public sector. Retail and SME fee income was fairly stable taking into account seasonality, and we see opportunities to further improve income from securities and insurance sales.

All in all, a solid quarter of core revenues. We will continue to grow on our core Retail and SME products, be disciplined and cautious and adapt to the overall changing macroeconomic environment, both from a credit as well as rate standpoint.

And with that moving on to operating expenses on Slide 13. So operating expenses were up 8% versus the prior quarter, driven by absorbing the cost from the newly closed acquisitions as well as very small items. The cost-income ratio was 43.5% for the quarter and 42.9% for the half year, which is completely in line with our full year target. Efficiency and the self-help mentality has and will always be at the core of our DNA. This has been the approach that has guided us over the past few years and the catalyst of our transformation.

The cost base and our [indiscernible] cost is of one of the few things management teams truly control. We are confident in our ability to meet our cost-income ratio target despite any potential deterioration in macroeconomic environment as we continue to identify opportunities across the front, middle and back office. We've already started working through the next level of cost savings and will continue to work hard on cost control and remain laser-focused on efficiency.

Slide 14. Another solid quarter on the risk side. The risk cost ratio was at 16 basis points for the quarter and our NPL ratio was 1.8%, reflecting our focus on developed markets with over 70% of our customer loans being in our home countries, which is the German-speaking region and roughly 30% in Western Europe and the United States.

There have been no changes to our risk strategy, which remains consistent with what we have communicated in previous quarters. We have no relevant exposures to Russia, Turkey, CEE or more broadly to emerging markets. Given our business is mainly domestic mass retail banking, we do not have any operations in countries with elevated AML risk.

For the rest of the year, absent any unforeseeable events, obviously, we expect to see stay at the lower end of our through-the-cycle guidance of 15 to 25 basis points in terms of risk cost ratio.

On Slide 15, more details on capital. Our CET1 ratio was at 15.1%, our Tier 1 capital ratio was 16.6% and total capital ratio 18.9%, all before any capital actions.

As of half year, the 2019 dividend accrual would cost 50 basis points and the proposed share buyback of EUR 400 million would translate to 190 basis points of CET1 capital. As stated earlier, this would result in a pro forma CET1 ratio of 12.7%, which is in line with our stated target range of 12% to 13%.

On Slide 16, we lay out the normalized P&L and return on tangible common equity ratios over the past 6 quarters, as this gives a good view of underlying earnings development. This spreads the regulatory costs evenly across the year versus the front-loaded charges in the first quarter, which is required under accounting and regulatory standards.

To conclude on Slide 17, we are reaffirming our targets at our 2018 year-end, we upgraded our targets by moving our general 3-year targets 1 year forward on the back of strong operating performance in 2018, our profit before tax target of greater than EUR 600 million in 2019 and greater than EUR 640 million in 2020 represents annual growth rate of over 6%. The target cost-income ratio under 43% in 2019, and a target of under 40% in 2020. The return on tangible common equity target also remains the same within a range of 15% to 20%. And our CET1 ratio target ranges from 12% to 13%. Our pretax EPS targets are greater than EUR 6 per share in 2019 and greater than EUR 6.40 per share in 2020. Our target post-tax EPS is greater than EUR 4.50 per share in 2019 and EUR 4.80 per share in 2020. Please note that all EPS targets are before the impact of any capital actions.

With that, operator, let's open the call for questions. Thank you.

[Operator]

[Operator Instructions] And your first question today is from the line of Giulia Miotto from Morgan Stanley.

[Giulia Miotto, analyst]

2 questions from me, please, one on capital and one on NII. And -- so on capital, it seems to me like your share buyback case should be quite straightforward, i.e you have excess capital, you generated a lot of excess capital. So can you just give us some color on why it is taking so long and how the process works, that will be useful. And then on the second point, so NII, you provided some sensitivity on what further negative interest rates could do to your top line, which is very helpful. If I understand you correctly, your targets exclude any impact from interest rates higher or lower.

So can you, perhaps, give us more details on how you plan to mitigate the negative drag, should they cut rates further?

[Anas Abuzaakouk, executive]

Giulia, good questions. I'll take the capital and Enver will take the NII question. As far as just capital, we got the AGM approval in April 30, which I alluded through on the call on the -- when we went through the presentation. We filed the regulatory application shortly thereafter. And to be quite frank, this is just the normal course of action in terms of dialogue with the regulators. Very positive feedback in those -- and very constructive dialogue. And we expect this is a second half 2019 event in terms of approval as well as execution on the proposed share buyback. Nothing out of the ordinary. We feel very confident about the process that's underway, but this is just a process from a regulatory standpoint. So I hope that answers your question on capital.

[Enver Sirucic, executive]

Giulia, on the NII. So the impact on targets, I would phrase it that way, yes, we have not included any positive or negative rate movement, that's why we disclosed the sensitivity so we have the transparency, what would happen if rates change. I would say partly this reflected in our targets because rates, especially on the long-term and have moved over the last couple of quarters significantly. With short end, we've only seen a few basis points move that is considered. So any additional moves are not reflected yet. On the measures we would focus, as we mentioned in call on self-help, so it would be more on the cost side, but we're are also working a few revenue initiatives to cover if rates really change in that direction.

[Giulia Miotto, analyst]

So I can assume that your targets still hold even if rates go more negative?

[Enver Sirucic, executive]

That's correct, yes.

[Anas Abuzaakouk, executive]

Yes.

[Operator]

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

[Pawel Dziedzic, analyst]

2 questions from me as well. Just to follow up on the buyback. You mentioned that you're looking at several execution options. Can you just clarify what you mean by that, what options are you looking at and how do they differ, any pros and cons, or -- and anything related to the process going forward? And the second question is on your 2020 target and the cost-to-income and PBT, it assumes EUR 40 million PBT improvement. And could you help us understand what part of this improvement do you expect to come from cost and what part of that could come from revenues, given the more downbeat revenue outlook, it seems that most of this will come through cost, and if this is the case, can you maybe spend a little bit more time and just give us a flavor of what are those next-level cost savings and how quickly they can be delivered and so on, that could be very helpful.

[Anas Abuzaakouk, executive]

Pawel, again, good questions from your end as well. I'll take the questions and Enver will add on any specifics. So on the capital process as far as -- we can't be specific in terms of the execution options, that's obviously, for a variety of regulatory and commercial reasons. But I think, I mentioned this in the second quarter or the first quarter call. In all likelihood, the greatest proportionality will be towards a large tender. We're talking about a EUR 400 million share buyback, given just the liquidity in the stock, I think you can see it, the preponderance will be towards a large tender and -- but we're going through all the different options and that's something that we're looking through in the third and fourth quarter as far as an execution standpoint, but we feel that the execution options that are ahead of us will hopefully be successful, but we obviously don't want to get the cart in front of the horse. We want to make sure that we get the regulatory approval done and dusted first before the execution. So -- but we feel good. I think it's been a really constructive dialogue and we think we have a number of options ahead of us that, that will be successful.

On the 2020 target EUR 640 million, obviously negative rates. If that does come through in the second half of this year. Further rate cuts is not helpful. But having said that, we've always been committed to execution and we've talked about self-help, that's been the approach. Not just since we are public, but when we were a private company. So what we've done over the past 2 months is really dig deep in terms of understanding what areas of optimization we have across the group. In large part, this is cost. But if you kind of just -- we don't give NIM guidance and that's something that we kind of stayed away from.

We'd like to focus on over -- return on tangible common equity of over 15%, when we say 15% to 20% as far as a range. But I'll tell you look, the other income we've always said is under 5% that's kind of in at the 3% to 5% range that probably be on the upper end of that just given -- just where overall securities portfolio is. And on the cost-income ratio under 40%, absolutely, it's a challenge, and in declining rate environment, you don't get the list from incremental revenue. We always assume a static rate environment, so we're potentially not dealing with a negative rate environment. But I think if you look at what I said on the Retail and SME, we're at 45% post the acquisitions being absorbed and that was part of the reason for the cost inflation this quarter. If you look at that for 2020, I stated under 42%. So that kind of starts to give you a road map as to how we actually take up further cost. And in large part a lot of that is embedded within the Retail and SME. And look, and the reality is if negative rates continue at this level, we'll start to continue to see a benign credit environment. So I think when we guided 15 to 25 basis points on the risk cost, that'll probably be a tighter range similar to what you probably see this year and in last year as well. So I think the combination of those factors will probably get you to your EUR 640 million, but we try to avoid individual P&L line items bubble because things are dynamic. What we are committed to is executing on our targets, bottom line targets and making sure that we hit the EUR 640 million target. We move that forward this year because we are confident in the operating performance, and we'll continue to do -- take the measures necessary to be able to hit those targets, both this year over EUR 600 million as well as next over EU 640 million.

That's a long answer, Pawel.

[Pawel Dziedzic, analyst]

Yes. No, that was very helpful. I didn't mean to push into individual items, more just get a sense because you did refer in your presentation that the measures you're going to take are under your control. So from that, but the most of that is really on the cost side where you have a good clarity. On the...

[Anas Abuzaakouk, executive]

That's correct.

[Pawel Dziedzic, analyst]

On the rate impact, can I just maybe follow up? The sensitivity, do you assume any tearing or, for instance, any offsetting and mitigating measures that can be implemented or this is just a...

[Anas Abuzaakouk, executive]

No, honestly we didn't invest in any potential positive impact from tearing, if that comes through, that's great but the reality is that we can bank on that. We will bank on it if there are negative rates, we know where we are on the curve. And what the headwinds are for 2020 and we have measures to be able to offset that. And primarily, that is focused on the cost side. But also that makes a more benign credit environment and there's things you can do in terms of securities portfolio as well as just overall risk cost. So -- in large part, it is a self-help through the cost line.

[Operator]

The next question is from the line of Gabor Kemeny from Autonomous Research.

[Gabor Kemeny, analyst]

I have 2 questions, please. One is on the corporate segment where I saw your net interest margin dropped quite significantly, 14 basis points to about 1.7%. Was it driven by lower interest rates? And what do you think is the outlook here for the rest of the year? And just on your 2019 PBT guidance, which is more than EUR 600 million. If we look at just the first half, I think you were running a little bit below that level.

I understand that on the one hand you had the regulatory charges, on the other hand, you had the bond gains. But it would be useful as to understand where you see the improvement could come from in the second half?

[Enver Sirucic, executive]

Gabor, let me take the NIM question and corporates. Yes, we had a drop in second quarter Corporate and Public. On one side, we had a good asset development, you've seen across the product lines, that is the growth. It is really Q1 was a bit higher than the average over the last couple of quarters, if you look at the numbers. And I think the 169 is probably a bit on the low end. I would expect it to be in the 170s going forward, which is kind of in line what we've seen in the last quarter. The impact that we see there, sometimes we have early redemptions that we're going to have front-loaded NII impact, so there is bit of volatility across the quarters, but I think, from a run rate, it should be higher than what you've seen in the second quarter.

Yes, I think 2019 PBT is EUR 600 million -- we have really, very good line of sight for hitting the target. You mentioned the one obvious thing is the regulatory charges that are front-loaded. If you normalize for that, it's already -- we're on track to hit the EUR 600 million and everything that Anas said before on the 2020 already will apply in 2019. So some of the things that we're working on, you will see positive impact across the lines, some bit on the revenue side, but more also on the cost side, not so much in Q3, but going into Q4, I would expect an improvement there.

[Gabor Kemeny, analyst]

On the cost side, especially?.

[Enver Sirucic, executive]

Yes.

[Gabor Kemeny, analyst]

Okay. That's clear. Is it coming from the Südwestbank restructuring or any other measures you would like to call out ?

[Anas Abuzaakouk, executive]

See, Gabor, it's a mix of -- obviously, we did a lot of heavy lifting on Südwestbank last year. There's some positives this year, but this is a reflection of lot of the group-wide initiatives that we're launching from the front, middle and back office, be it on the operations, technology spend, we talked about more of a defined perimeter for our retail network. So it's -- there isn't 1 single silver bullet. It's a collection of a lot of small initiatives that will get us to the positive operating leverage. So that's what we're really confident being able to deliver.

[Operator]

The next question is from the line of Simon Nellis from Citibank.

[Simon Nellis, analyst]

Yes, just a few questions. Firstly, I'd just be interested in any update on the outlook of the M&A pipeline, I guess, your focus is on the buyback, but you still seem to have some firepower, any comments you can provide there? On Slide 6, I see that you're showing some pretty good consumer and SME lending growth, if you could just elaborate what's driving that, and I'd be particularly interested in knowing how developments are in Germany. I think, you kind of launched or you've integrated Qlick into a Südwestbank and how that's progressing? And then just last, I'd be interested in a little bit more detail on the strong treasury results and what was behind that? I think in the morning, Enver, you said that it should be NII neutral. If you could just again kind of explain why that's the case, the bond sales?

[Anas Abuzaakouk, executive]

Simon, I'll take the M&A, and then Enver will address the consumer SME as well as the treasury results. So just to let you know, we're equally focused on the day-to-day operations as well as pursuing M&A, in addition to the buyback. So it's not focus purely on the buyback, we're confident that we'll be able to execute that, but there's a lot of other things going on. As far as the pipeline, it's pretty robust. It's more a reflection of small bolt-on acquisitions, similar to what you saw last year with the 3 acquisitions in terms of kind of size and flavor. It's all obviously, a matter of can we get a deal at the right price. We're looking at a few things, both in Germany and Austria, and it's just a matter of if it's the right fit, ultimately, and it comes at the right value, and we actually win the deal. So we're pretty positive, but obviously that's something that we don't factor into our targets. If it happens, fantastic, if it doesn't, we'll continue to be disappointed in executing on our day-to-day operations. But we're still bullish on the M&A front. Enver, take the consumer asset.

[Enver Sirucic, executive]

Yes. So Simon, on the consumer lending role, I would take couple of things that are helpful or supporting the development. So on the one side, domestically, in Austria, the teams are doing a great job with the the new partnerships, bringing new volumes, obviously also the acquisitions that we did add or support the positive growth.

But also in German -- in Germany, the initiatives that we launched over the last couple of quarters, are already showing an impact. So, for example, Qlick, the online consumer lending went live a few months ago, and we are seeing steadily increasing volume coming through that channel as well as, for example, on the brokerage, mortgage broker channel. So everything so far in Austria and Germany really very positive, and we expect that trend to continue on both the consumer, but also on the mortgage loans. And I think, on the treasury result, yes, so what really happened is, we optimized our securities portfolio. What we did is we sold some bonds, which were primarily negative yielding, so that's why you don't really see an impact on NII. They had still embedded hidden reserves, just giving the distortion in market and the changed interest rate curve over the long term, and we took advantage of that situation.

[Simon Nellis, analyst]

All right, okay. Maybe just one follow-up on the corporate income public sector division. Can you just tell us how much exposure you have at CRE? And what's the geographic mix? And how much NPL financing you have, and again the geographic mix will be useful?

[Anas Abuzaakouk, executive]

Yes, so Simon, we don't break out the, unless we have it in the risk report, we just put it under asset-backed lending, which is primarily real estate lending. It makes up traditional commercial real estate as well as the NPL financing, which we called portfolio financing in the past.

I would say that's a mix, I don't have the exact numbers, but that's a mix of Western Europe and Spain to a certain degree. But that's traditional commercial real estate to be quite frank. We haven't done much of that for the past few years just as we've seen cap rates fall below 5%, 4% you see some really irrational-type deals up there in pricing.

The NPL financing, we love that. We like that asset class, but that's just a matter of bringing on deals, and we have some things in the pipeline, but obviously, it takes time to come to fruition. But overall blend, we can have Jutta come back to you on the specific breakouts.

[Operator]

The next question is from the line of Marcell Houben from Crédit Suisse.

[Marcell Houben, analyst]

Most of my questions have been answered, but just 2 left, I suppose. On the Corporate and Public, you were saying about the group optimization of cost in back office. We've seen some good costs delivery on the Corporate and Public sector. What should we expect that going forward, is it -- do you expect more cost savings in that division predominantly, especially if revenues continue to be under pressure a little bit? That was the first question. Second on the cost of risk in the corporate center, which is quite inflated this quarter, is it something special or just a one-off?

[Anas Abuzaakouk, executive]

So on the Corporates & Public sector, Marcell, it's not just specific to that segment. It's across the whole group, but absolutely, you'll start to see efficiency gains there. I think we came in at 36% cost-income ratio. Probably the way to look at that is 30% to 35% for the Corporates & Public sector which if you think on a run rate basis, historically, it's kind of always been in that range, but it's not something that's just specific to that business unit, it's across the entire group.

And sorry the second question?

[Enver Sirucic, executive]

Yes, it was a one-off in the corporate center. Nothing that you would expect from...

[Anas Abuzaakouk, executive]

Is it helpful?

[Marcell Houben, analyst]

Yes, very much.

[Operator]

The next question is from the line of Máté Nemes from UBS.

[Mate Nemes, analyst]

I have 2 questions left. First one on still the Corporates & Public segment. I noticed that the public client balances or assets started to grow actually for the first time in a year or so. What is happening there? Has -- actually you're stabilized there or risk-adjusted returns looking better? What is your outlook on that pocket? And secondly, on RWAs, specifically on average risk rate or risk density, I think it has increased from 44% last quarter to 47% now, if you could just give us some color on the move and also perhaps talk a little bit about the low 40s level that you're targeting? If you could just give us some timeline there and how exactly you plan to get there?

[Enver Sirucic, executive]

Okay, Máté. So on the corporate bond, yes, we had a positive that has a change in the public sector as well. What we did, there was a campaign with the municipalities in Austria which we did that was very successful, where it made sense also from a risk/return perspective for us. We're a bit more defensive on that sector, so we actually, of course, want to keep and develop the relationship.

But usually, we'll not take it on our balance sheet. In this case, it can be made a lot of sense, just because we got a bit more return for the exposure. I would not expect that to be a growing segment over the next quarters. So I think it should be fairly stable. The RWA density that was really a very technical impact. I mean you have seen the RWAs went up 1%, that was largely by the new acquisitions. The density increased because we reduced our balance sheet. We repaid majority of the TLTRO-II, which was almost EUR 2 billion, with that the denominator was shrinking, and that's why the RWA density went up.

So I think, we are very positive about the development in the future, but it will also depend a bit on the overall balance sheet composition.

[Operator]

The next question is from the line of Stefan Maxian from RCB.

[Stefan Maxian, analyst]

Just 1 question remaining to understand the fee and commission line a bit better. I mean first, was there any M&A-related impacts in the last quarter on fee and commission and also like going forward, do you see this erosion that, that we see currently in the fee and commission line to end in the coming quarters? Or what initiatives do you have actually to stop that erosion?

[Enver Sirucic, executive]

Yes. So Stefan, on the NCI, yes, there was a small impact from the new acquisitions with most of the contribution went to the NII line. For the coming quarters, Q3 is usually the toughest quarter in terms of NCI, just the seasonal impact of the summer holidays. There are a couple of things that you want to improve on, especially on the advisory business, which is in the securities and insurance, we think we can do a better job on that. Will you see the impact in the next quarter, probably not, because, as I said that's seasonally a tough quarter in terms of NCI, but over the next, the longer term for 2019, 2020, yes, we are planning to launch different initiatives to support that P&L line?

[Operator]

The next question is from the line of [ Jeff Atinson ] from [ Gulf Tree Assets ].

[Unknown Analyst]

Anas and Enver. Congratulations again on another strong quarter and differentiated execution. I just wanted to drill down a little bit on the question that Giulia asked earlier, about approvals for capital return. I understand that management doesn't control the timeline and I'm respectful that the regulators must complete their due process. That said, can you share with us the timeline under which you think that ECB is operating or asked another way, is there a specific date by which the ECB is obligated to give you an answer or is it just take -- the longer it takes.

[Anas Abuzaakouk, executive]

So [ Jeff ], we we put in the application shortly after the AGM. Obviously, there is defined parameters, but it's been a very constructive dialogue. This is not a matter of somebody being on the clock and the time expiring for them to come to a conclusion. This is more just the back and forth in terms of questions, making sure that any open questions are answered. I think we've done a really nice job on the front. We've been incredibly open and transparent in this process and this was just something that takes some time. This is obviously a very large share buyback, its EUR 400 million is what we're contemplating.

This is one of the first of its kind. So this will take some time, but we feel confident in being able to see this through resolution or conclusion here in the second half of 2019, and also hopefully executing on in the second half of '19.

[Operator]

We have no further questions at this time, so I'll hand back to the speakers.

[Anas Abuzaakouk, executive]

Thank you, everyone. I hope everybody enjoys the remaining part of the summer holidays in August, and we will catch up with you on the third quarter call. Take care. All the best.

[Operator]

Thank you. That does conclude the conference for today. Thank you for participating, and you may now disconnect.