BAWAG Group AG

VSE:BG

Earnings Call Transcript 2021-Q2

[Operator]

Thank you all for standing by, and welcome to today's BAWAG Group Q2 2021 Results Conference Call. [Operator Instructions] Please be advised that today's call is being recorded, and a transcript will be published on the company's website.

I'll be now handing the call over to your speaker, the CEO, Mr. Anas Abuzaakouk. Thank you.

[Anas Abuzaakouk, executive]

Thank you, operator. Good morning, everyone. I hope everyone is keeping well and enjoying the summer months. I'm joined this morning by Enver, our CFO.

Let's start with a summary of the second quarter results on Slide 3. We delivered net profit of EUR 119 million, earnings per share of EUR 1.34 per share, and a return on tangible common equity of 16.3% during the second quarter.

The underlying operating performance of our business was strong with pre-provision profits of EUR 181 million and a cost-income ratio of approximately 40%. Total risk costs were EUR 24 million, with the ECL management overlay now at EUR 70 million. We continue to not release any credit reserves, although we see a substantially improved macroeconomic environment from early in the year and continued positive developments across our customer base.

In particular, observing payment holidays falling to 20 basis points across our total customer business. We will reassess the management overlay during the second half of the year once we've seen greater normalization and stabilization of economic activity.

In terms of customer loan growth and capital, average customer loans were stable quarter-over-quarter and up 3% year-over-year. We continue to accrete CET1 capital, generating 60 basis points of gross capital during the quarter. Our CET1 ratio was 14.4%, up 40 basis points from year-end 2020 after all dividend deductions.

As of second quarter and after deducting all current dividend commitments totaling EUR 515 million, we have additional excess capital of EUR 436 million versus our target CET1 ratio of 12.25%.

In terms of dividend distributions, we still have our earmarked dividend of EUR 420 million from 2019 and 2020 profits, which have always been deducted from CET1 capital and remain in profit reserves. Our plan is to pay the outstanding 2019 and 2020 dividend of EUR 420 million or EUR 4.72 per share, subject to shareholder approval at the AGM on August 27 now that the ECB-recommended dividend ban has been lifted sometime in early October.

In terms of 2021 targets, given the strong business performance during the first half of the year, the improving macroeconomic environment we're witnessing and the continued improvement in credit quality across the business, we are upgrading our targets for the full year. We now expect to deliver a return on tangible common equity of approximately 15%, and a cost-income ratio of around 40% this year.

On the M&A front, we signed the acquisition of Hello bank! Austria last week. Hello bank! Austria is the leading online retail brokerage platform in Austria and allows us to bolt on an online brokerage product to our existing easybank offering, adding 80,000 new customers, which fits in nicely with our overall retail and SME offering.

We also expect the DEPFA BANK acquisition we signed during the first quarter, which is capital accretive day 1, to close in the second half of the year. Both deals will have no impact on our overall capital distribution plans. I'll provide more details on both acquisitions later in the presentation.

Given the recent lifting of the ECB-recommended dividend ban and the scheduling of our AGM for late August, we've decided to move up our Investor Day to September 20. We plan to share updated financial targets and we'll provide a new 4-year plan through 2025.

We also plan to release the results of our stress test on July 30, shortly after the release of stress test results from the regulators. The past 16 months have been incredibly challenging and not without adversity, testing our collective patience and resolve. However, the COVID-19 pandemic truly highlighted the quality, resilience and sustainability of our franchise. With everything we've gone through, the team is more excited than ever to address the many opportunities ahead of us.

Moving on to Slide 4. We delivered net profit of EUR 119 million, up 94% versus prior year. Overall, a strong operating performance with operating income of EUR 303 million and total expenses of EUR 121 million, up 6% and down 3%, respectively, versus prior year. Total pre-provision profits were EUR 181 million, up 14% versus prior year. Risk costs were EUR 24 million, down 68% versus prior year and reflecting the normalization of risk costs. Tangible book value per share was EUR 33.38, up 5% versus prior year and 2% versus prior quarter. This assumes the deduction of the earmarked EUR 420 million dividend from 2019-2020 profits as well as the first half 2021 dividend accrual of EUR 95 million.

Onto Slide 5. At the end of the first quarter, our CET1 ratio was 14.4% after deducting the remaining earmarked dividends from profit reserves of EUR 420 million and deducting the first half 2021 dividend accrual of EUR 95 million. We look forward to finally distributing the remaining earmarked dividends of EUR 420 million as we look to honor commitments to shareholders and believe the bank's continued resilience and overall strong capital levels position us well to resume ordinary capital distributions going forward.

For the quarter, we generated 60 basis points of gross capital as we continue to consistently generate significant amounts of capital, averaging over 220 basis points annual gross capital generation over the past 4 years.

As of the second quarter and after deducting all dividend commitments, we have excess capital of EUR 436 million versus our target CET1 ratio of 12.25% and stand at 528 basis point buffer to our SREP of 9.14%. To the extent that we are unable to deploy our excess capital and organic growth or M&A, we will distribute capital to shareholders through share buybacks and/or special dividends on an annual basis in a normalized environment as part of our ordinary capital distribution plans.

On Slide 6, a recap of the 2 M&A transactions signed this year. We signed the acquisition of Hello bank! Austria last week and are excited about the team joining the business and the many opportunities ahead of us. Hello bank! Austria is the leading online retail brokerage platform in Austria and allows us to bolt on a brokerage product to our existing easybank platform, adding 80,000 new customers, which fits in nicely with our overall retail and SME product offering. The deal is expected to close in the fourth quarter of this year or first quarter of 2022. We underwrote the deal to a return on tangible common equity greater than 15% and will have a day 1 impact on our CET1 ratio of low double-digit basis points. The deal will add over EUR 10 million of pretax profit post transformation.

We also expect the DEPFA BANK acquisition, which we signed during the first quarter, to close during the second half of the year. The DEPFA transaction represents an accelerated operational wind down of DEPFA BANK, leveraging BAWAG's operational capabilities and infrastructure, while taking little to no credit risk. The deal is capital accretive with a day 1 gain of over EUR 60 million, which will in turn be reinvested to accelerate our business transformation. Both deals will have no impact on our overall capital distribution plans. More details will be provided during our investor presentation as part of our 4-year business plan.

On Slide 7, our retail and SME business delivered net profit of EUR 94 million, up 40% versus the prior year and generating a very strong return on tangible common equity of 25% and a cost-income ratio of 38%.

Average assets for the quarter were EUR 20.1 billion, up 10% versus prior year and 2% versus prior quarter, which is driven by continued growth in housing loans and the pickup in consumer loans. Average customer deposits were EUR 26 billion, up 7% versus prior year and 2% versus prior quarter. Pre-provision profits were EUR 141 million, up 12% compared to the prior year, with operating income up 6% as we begin to see a gradual normalization of customer activity.

Overall operating expenses were down 4% versus prior year, resulting from prior year operational initiatives with a continued focus on driving synergies across our various channels and products.

Risk costs were EUR 15 million, down 58% versus prior year, reflecting a gradual normalization of risk costs without any credit reserve releases. The trend in asset quality continues to improve across our customer base with payment holidays up 30 basis points as of the end of the second quarter versus 1.2% at year-end with a customer payment rate of 90% on all expired deferrals with an average of 9 months. Additionally, 87% of all customer loans that are either in active deferral or nonpaying after deferral expiration already captured in stage 2 or stage 3 loans.

We've continued to execute on our various operational and strategic initiatives. We expect to see continued average asset growth and efficiency gains across the retail and SME franchise as well as a shift to a greater percentage of secured housing loans for the balance of the year. We also expect the second half of the year to look very similar to the second quarter with normalization of customer activity continuing in the months ahead.

On Slide 8, our corporate and public business delivered net profit of EUR 35 million, up 149% versus the prior year and generating a strong return on tangible common equity of 16% and a cost-income ratio of 22%. Average assets for the quarter were EUR 13.4 billion, down 4% versus prior year and 2% versus prior quarter, driven primarily by lower corporate and public sector cash advances as well as delayed funding on several loan commitments. Pre-provision profits were EUR 58 million, up 21% compared to the prior year. Risk costs were EUR 10 million, down 65% compared to the prior year, reflecting positive developments across our customer base with no reserve releases taken as well.

The trend in asset quality continues to improve with payment holidays at 10 basis points and 100% paying ratio for customers that took up payment holidays over the last year.

Suffice it to say, we've been pleasantly surprised with how our customers have responded and the overall credit performance of the business. We continue to see solid and diversified lending opportunities as well as a greater normalization of customer activity and several commitments funding in the second half of the year. We will continue to maintain our disciplined underwriting, focus on risk-adjusted returns and avoid blindly chasing volume growth.

With that, I'll hand over to Enver.

[Enver Sirucic, executive]

Thank you, Anas. I will continue on Slide 10. Overall, strong results in the second quarter, core revenue is up 1% versus Q1 with both better net interest income and net commission income. Compared to prior year, core revenues were actually up 6%. Operating expenses further came down as well as risk costs without releasing any credit reserves. This all led to a significant improvement of net profit by 62% versus Q1 and 94% versus prior year as well as all key ratios improving.

On Slide 11, an overview of our balance sheet. We saw a very stable level of average interest-bearing assets over the last few quarters with a mix of growing customer loans offsetting lower securities and bonds, leaving us overall with a significant cash position. We believe that being patient at the current interest and spread levels will provide an interesting opportunity in the future to deploy our excess cash. On the funding side, we see growing deposits. And also, we continued improving our long-term funding profile through issuing the next EUR 500 million covered bond, first time at the negative spread.

On Slide 12, core revenues. Net interest income up 1% versus Q1 with a stable net interest margin of 228 basis points, which is in line with prior quarters. We see a positive trend in NII for the rest of the year, which is driven by continued growth in housing loans and a pickup in consumer loans as well as a greater normalization of customer activity and the number of commitments in corporates and public sector segment funding in the second half of the year.

In terms of net commission income, recovery trend continues, up 4% versus first quarter. We observed the continued overall improvement, especially with the stronger advisory business while we still see subdued activity in selected business areas compared to pre-pandemic levels. For the full year, expectations are unchanged. We still see core revenues growing by 2%.

With that, moving on to Slide 13. Operating expenses further came down. Cost-income ratio was at 40.1% for the quarter. Absolute costs came in at EUR 121 million, and we expect further gradual OpEx decreases over the coming quarters.

For the full year, we expect to be below EUR 485 million in absolute costs, and we updated our '21 cost-income ratio target, which is now to be at around 40%.

Slide 14, risk costs. In general, unchanged conservative and prudent approach on provisioning with improving underlying trends and the strong asset quality performance. In Q2, we booked EUR 24 million of risk costs, mainly driven by normal run rate in Retail & SME of approximately EUR 15 million. Overall, we have not released any credit reserves and the ECL management overlay now stands at EUR 70 million versus EUR 52 million as of first quarter. We will reassess the management overlay during the second half of the year once we have seen greater normalization and stabilization of economic activity.

Without taking any releases into account, we are updating our numbers and expect risk costs to come in below EUR 100 million for the full year, again, without releasing any ECL reserves.

Slide 15 provides more details on reserves. Overall, reserves increased by 5% versus year-end resulting in a total reserve ratio of 1.5% and a cash coverage ratio of 45%, excluding City of Linz, which was fully provisioned through capital prudential filter last year, therefore, with no impact on our capital distribution plans even in a worst-case scenario.

Total ECL reserves now stand at EUR 147 million, up 13% versus year-end, of which almost 50% or EUR 70 million is comprised of management overlay reserves, which we will reassess during the second half of the year.

H2 assets continued to decline, approaching pre-pandemic levels, while we have not executed any routine retail NPL sales since Q2 of last year. Overall, we see both an improved overall macro environment and continued positive development across our customer base and asset quality.

To wrap up on Slide 16, we updated our 2021 targets to approximately 15% RoTCE and around 40% cost-income ratio. In detail, this is based on core revenues growing by 2%, while we expect other income to be flat for the year. Operating expenses to fall below EUR 485 million, risk costs to come in below EUR 100 million and regulatory charges to land at EUR 60 million for full year, of which we have taken EUR 56 million year-to-date.

We have also decided to move up our Investor Day to September 20. We plan to share updated financial targets and we'll provide a new 4-year plan through 2025.

And with that, operator, let's open up the call for questions. Thank you. Operator, we can open the line for questions.

[Operator]

[Operator Instructions] The first question is from the line of Izabel Dobreva from Morgan Stanley.

[Izabel Dobreva, analyst]

I have 3 questions for you. So the first one is on capital deployment. You mentioned in one of the slides that you now have nearly EUR 450 million of excess relative to your 12% target. And you have been very clear about potential future distributions. But I wanted to clarify the timing a little bit regarding any potential buybacks. How should we think about the timing of any potential announcement? Could the buyback be restarted already from January next year? Or would you think about it more as a year-end event towards the end of next year? So that's the first question.

Then my second question is on DEPFA. In there, you mentioned a EUR 60 million day 1 capital gain, which is going to be reinvested in the business. And I wanted to clarify, does this mean that you can fund restructuring charges with this gain to this degree and basically take out further cost? So if we assume a 3-year payback, does that mean that you can potentially strip out another 4% of the cost base?

And then my final question is just on the City of Linz. If you could remind us of the time line there regarding the final decision.

[Anas Abuzaakouk, executive]

Izabel, hope you're doing well. So for your questions, I'll take the capital and then Enver will take the question on debt on the City of Linz. So with regards to capital, I think it's best that for the Investor Day, we will provide greater clarity on the excess capital as well as capital distribution plans. So it's not a year-end event. I think it's something in September, hopefully, we'll be able to provide more clarity on. DEPFA, for the EUR 60 million?

[Enver Sirucic, executive]

Yes. On DEPFA, Izabel, look, the EUR 60 million is -- it's a day 1 impact after we have taken all future losses, charges, whatsoever associated with the transaction. The plan would be to share more details with you also at the Investor Day. But the idea is to reinvest, you mentioned restructuring, it will be a variety of measures with actually, at the end, probably very limited to no bottom line impact.

On the City of Linz, we are now finally at the Supreme Court. We filed the appeal, now we are waiting actually for the decision of the Supreme Court that could happen in the next couple of weeks, months or it could take longer. We don't really have a line of sight when the decision is being made.

[Anas Abuzaakouk, executive]

I'll just add, Izabel, on the City of Linz, we provided in our supplemental information, the page just walking through the different scenarios and trying to explain what -- the decision at the Supreme Court now is with regards to the validity of the contract. It does not address damages. We've tried to highlight is, obviously, there's no impact on capital as we've taken a full provision through the prudential filter. And I think that should provide some explanation in terms of how the receivable is treated versus from a balance sheet standpoint as opposed to from a capital standpoint. But hopefully, we get a decision soon, but that's obviously out of our hands and we feel strongly about the case. That's why we stuck with it for the past decade. So thank you.

[Operator]

Next question is from the line of Máté Nemes from UBS.

[Mate Nemes, analyst]

I have 3 questions, please. Firstly, on the 2% core revenue growth guidance. Could you help us understand a bit better what is that predicated upon especially after the second quarter, and it seems already Q1, Q2 or together, H1 run rate would be sufficient for hitting that 2% revenue growth. Is there any negative item? Is there any attrition on the loan book that you expect in the second half, perhaps something negative on fees that would make you come out with a reconfirmed conservative guidance?

The second question is on risk costs. The EUR 100 million risk cost guidance excludes any provision releases. I think that's what you commented. And nevertheless, do you see scope for provision releases outside that guidance in the second half? And if so, could you comment how that could be done then and so on?

And thirdly, could you give us a time line on Hello bank! By when do you expect to get to the EUR 10 million pretax profit mark? And what sort of restructuring costs should we assume here?

[Enver Sirucic, executive]

Thanks, Máté. I'll take the core revenue question. Look, I think you're absolutely right. If you take the run rate of first quarter, second quarter, extrapolate, you'll probably land a bit higher than that. We have just not updated every time the guidance. But put it that way, we are just very cautious on our assumptions. That's all.

[Anas Abuzaakouk, executive]

Máté, it's Anas. On the risk cost, it's good that you clarified that. It's under EUR 100 million for the year, assuming no reserve releases. But our preference, quite frankly, is, a, just to see the normalization of customer activity. And I think that's best reflected in the payment holidays, which we mentioned is 20 basis points across the whole customer loan book. The stage 2 percent of our loans, which is 6% and probably migrating to pre-COVID levels of 4%. I think those are the best indications.

As far as the reserve release, we want to be prudent and cautious. I think we've said that last year, we've said that in the first half of this year, and we're going to continue even in the second half to be prudent and cautious. So -- however, we treat the ECL management overlay of EUR 70 million, and that will probably be a growing balance. We're always going to be prudent and cautious.

As it relates to Hello bank!, that is hopefully fourth quarter, first quarter of next year -- fourth quarter of this year, first quarter of next year. And the restructuring costs are embedded in the low double-digit CET1 impact that I mentioned.

So we don't disclose the actual numbers, given that this is a domestic acquisition, the EUR 10 million of pretax profit. I think on a conservative side, assume that's after 2 years. Hopefully sooner, I think we've had a track record of doing things a bit earlier. But just to be on the conservative side, I think we'd say over 10%. And more importantly, we underwrote it to a return on tangible common equity of greater than 15%. Hope that helps, Máté.

[Operator]

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

[Gabor Kemeny, analyst]

A couple of questions. Firstly, another one on the share buyback. Have you requested approval for share buybacks from the ECB yet?

And the second one is on the DEPFA acquisition. You mentioned EUR 60 million of day 1 gain. I mean shall we read it like you are reinvesting the potential capital gain into restructuring, into group restructuring? And if so, we should not expect like a meaningful capital impact from this deal over the next year or so? Would that be a kind of fair interpretation?

And then just finally on retail loan origination, which seems to be trending pretty well, especially on mortgages, if you can comment on the trends here and how your Dutch mortgage business is doing. How much are you originating there?

[Anas Abuzaakouk, executive]

Gabor, hope you're doing well, man. On the share buyback, nothing is formally applied. I think we'll just wait until the Investor Day to provide greater clarity in terms of overall capital distribution plans, which potentially could include on the share buyback. I think I'll leave it at that.

On the DEPFA side, you're absolutely right, EUR 60 million is the day 1 gain. But effectively, we're going to reinvest that. Part of that is restructuring, as Enver had mentioned, there's going to be no P&L drag post-closing. And also, that's going to be reinvested in terms of footprint optimization and a lot of other things we're doing from a transformational standpoint, from a cost standpoint as well as in other areas of the business.

And then as far as the retail loan origination, yes, spot on. I think what you'll see in the first half of the year will continue in the coming quarters in terms of asset growth on an average basis for both housing loans as well as in consumer and SME. So it's a good development on that front. We feel pretty positive on that front. So I hope that helps, Gabor.

[Gabor Kemeny, analyst]

Yes, it does. Just a quick follow-up. What's the size roughly of your Dutch mortgage book these days?

[Anas Abuzaakouk, executive]

What did he say? What's the size of the Dutch mortgage book? Yes. I'd say, look, the total housing loans right now, I think, is around EUR 15.5 billion -- sorry, what's the number? About EUR 15.5 billion or so now on the housing loans.

We just -- we reported as overall Austria, Germany, Netherlands and Switzerland. So we don't break that out separately. Yes. EUR 15.2 billion, just telling you the exact number, sir.

[Operator]

Next question is from the line of Mehmet Sevim from JPM.

[Mehmet Sevim, analyst]

First question on dividends, please. Are the plans still subject to ECB approval? And if so, could you please share whether you have received individual approval from the ECB on your dividend plans already? And I'm asking given the wording is vague when it comes to the process and it's stating that banks should seek ECB approval before market communication. So is there anything you can share beyond what we learned from the ECB on Friday?

And my second question was on Hello bank! I mean, obviously, a very exciting acquisition, given the shift we also see in customer behavior in many other countries. Can I ask what kind of synergies do you expect from the business with your existing easybank franchise? And this -- you're saying this is the leading brokerage already, but 80,000 customers, maybe still some room for growth in a country like Austria. So would you see this as a high growth business in the midterm? That will be my second question.

[Enver Sirucic, executive]

So on the dividend, we have no change, I think, on our plans since pretty much over the last 1.5 years. We always announced the same number. We always deducted the dividends, the EUR 420 million outstanding from the capital. So there is no formal approval needed to pay it out. We just wanted to wait for the new announcement from ECB that came out last Friday. So we feel good from our perspective.

The next steps are, as we said, is AGM. So we need the AGM approval. And after that, we will wait for the -- for the band, formally expired band of September and then paid out early October. So we think that is in line with the recommendation from ECB.

And Hello bank!, look, we feel very good about the deal. We like the team. We like the product. You're spot on. It's a growing business. In terms of synergies, it's a domestic play for us, which means, obviously, on the infrastructure side, there are certain synergies that we want to extract from the transaction. But first and foremost, it's really the team and the product that we are excited about.

[Operator]

[Operator Instructions] The next question is from the line of [ Giles Debros from Octo Finance ].

[Unknown Analyst]

Can you hear me?

[Anas Abuzaakouk, executive]

Yes.

[Unknown Analyst]

I had just a couple of questions. The first one is on the NII and on the TLTRO impact. Is it correct that you booked around EUR 7 million of impact in the first quarter and around 23% for the second quarter?

And my second question relates to the stage 3 loans. I was wondering why there's a small increase in Q2 of around EUR 20 million, if you could elaborate on this. And maybe do you give any guidance on the NPL ratio for the full year?

[Enver Sirucic, executive]

I think -- look, on the first one, it's very easy. On the TLTRO, no, it's not right. So we booked the same amount for Q1 and Q2. There is no difference in the number. And on the second one, we don't give any guidance on the NPL ratio for the full year.

[Operator]

And there are no further questions at this time. Please continue.

[Anas Abuzaakouk, executive]

Okay. Thank you, everyone. I hope everybody enjoy -- has a chance to enjoy the summer holiday and get a chance to get some much needed rest and relaxation. Take care and look forward to talking to you guys at the Investor Day. All the best. Bye.

[Operator]

Thank you. That concludes our call for today. You may all disconnect. Thank you all for participating.