BAWAG Group AG

VSE:BG

Earnings Call Transcript 2022-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the BAWAG Group Q2 2022 results call. [Operator Instructions] Please be advised that today's conference is being recorded and a transcript thereof will be published on the company's website.

I'd now like to hand the conference over to our speaker today, Anas Abuzaakouk, CEO of the company. Please go ahead.

[Anas Abuzaakouk, executive]

Thank you, operator. Good morning, everyone. I hope everyone is keeping well. I'm joined this morning as usual by Enver, our CFO.

Let's go ahead and get started with a summary of the second quarter results, on Slide 2. We delivered net profit of EUR 134 million, earnings per share of EUR 1.50 and a return on tangible common equity of 19%. The operating performance of our business was very strong with pre-provision profits of EUR 213 million and a cost income ratio of 35.7%. Total risk costs were EUR 30 million, inclusive of a EUR 6 million ECL management overlay, bringing our total management overlay to EUR 70 million despite sound credit performance and a record low NPL ratio of 1.4% or 1% when excluding the City of Linz legal case.

In terms of our balance sheet and capital, customer loans were up 5% quarter-over-quarter and up 13% year-over-year. We had a very strong second quarter in terms of customer loan growth, coupled with the purchase of a high quality retail and bond portfolio as part of the Sberbank Europe year of wind down process.

In terms of capital development, we generated approximately 70 basis points of gross capital during the quarter. Our CET1 ratio landed at 12.7% after deducting the recently approved share buyback program of EUR 325 million or half year dividend accrual of EUR 135 million, RWA growth type, the growth in customer loans, impacts to OCI from widening credit spreads and high quality portfolio purchase. Given the inflationary situation and rising interest rate expectations, the bank is positively positioned for a rising rate environment, specifically 100 basis point increase in 3 month Euribor translates into approximately EUR 100 million of incremental NII per year on a proportional basis with our strong operating performance during the first half of the year, and despite potential headwinds, building up we are reaffirming our full year targets for 2022. A profit before tax greater than EUR 675 million, return on tangible common equity greater than 17% and a cost income ratio under 38%.

We have also increased our core revenue growth outlook to greater than 7%. With the recent regulatory approval yesterday evening, of the first tranche of the share buyback program of EUR 325 million. We will start the buyback as of July 25. We expect this process to run through the end of the year. We will address the second tranche and further capital distributions around year-end results based on market developments and subject to regulatory approvals.

Above all else, we want to make sure we're prudent in our capital distribution plans, always maintain our fortress balance sheet and ensure we have sufficient dry powder to address potential organic and inorganic opportunities in the coming quarters. Given the potential headwinds we see building up from volatility in the energy markets, persistently high inflation, cautious consumer sentiment, prolonged geopolitical conflicts and the repricing of credit risk, we have added to our management overlay as we take a cautious and prudent approach to provisioning in the quarters ahead.

Our ECL management overlay, which now stands at EUR 70 million is equal to almost a full year of risk cost. We believe this will address any severe downturns and heightened volatility in the quarters ahead. The bulk of our management overlay was built up during the pandemic. We were very cautious in building up our reserves back in 2020. And we'll be equally cautious in our risk provisioning as we see a period of extended market volatility ahead, despite our record low NPL ratio and robust credit performance across the business debate. Our actions are born out of an abundance of caution, no different than how we reacted during the early days of the pandemic, or more broadly, the conservatism that underpins how we've run our business over the past decade.

Moving to Slide 3. We delivered net profit of EUR 134 million, up 12% versus prior year. Overall strong operating performance with operating income of EUR 331 million and total expenses of EUR 118 million, up 10% and down 2% respectively versus prior year. Total pre-provision profits were EUR 213 million, up 18% versus prior year. Risk costs were EUR 30 million, up 27% versus prior year, driven primarily by the buildup of our management overlay reserve. Tangible book value per share was EUR 31.68, down 5% versus prior year and flat versus prior quarter. This assumes the deduction of the first half dividend accrual of EUR 135 million and the EUR 325 million buyback.

Moving on to Slide 4. At the end of the second quarter, our CET1 ratio was 12.7%. In the quarter we generated approximately 70 basis points of gross capital, which was offset by an increase in RWAs from customer loan growth, consuming approximately 20 basis points of capital and negative OCI movements of approximately 30 basis points, primarily driven by widening credit spreads.

Before M&A and capital distributions, we landed at 15.2% CET1, which was up 10 basis points quarter-over-quarter. The purchase of the Sberbank portfolio is comprised of German consumer loans and the bond portfolio, consumed approximately 30 bps. For capital distribution items amounted to 220 basis points after deducting the first half dividends of EUR 135 million, which reflects a payout ratio of 55% of net profits in 2022 and the recently approved EUR 325 million share buyback. Net of all M&A and capital distributions, we landed at a CET1 ratio of 12.7% with approximately EUR 90 million of excess capital above our CET1 target of 12.25%.

Just as important is to look at the year-to-date capital developments where we have generated 120 basis points of gross capital generation offset by RWA growth, consuming approximately 50 basis points and negative OCI hit 50 basis points primarily from widening credit spreads. Despite the FX movements and the widening credit spreads, we believe we're well positioned to address multiple market opportunities given our earnings, capital and funding base.

Following our capital distribution framework, our primary focus is to deploy our capital into organic growth and value enhancing M&A. We currently see several potential organic and inorganic opportunities that we're assessing over the coming quarters. We will address the second tranche of our buyback and any further capital distribution measures around the year-end results based on market developments and subject to regulatory approvals.

On to Slide 5. We wanted to highlight the cornerstones of our franchise. We have a resilient business across all cycles with a very strong earnings capacity, strong capital generation, conservative and disciplined underwriting and a retail deposit franchise that is the foundation of our funding. This will allow us to consistently deliver quality results across all cycles. We believe the current geopolitical situation, significant inflationary headwinds, volatility in the energy markets and shifting global supply chains will cause real disruptions in the short and long-term. We do not know how this will play out. However, we want to ensure we remain vigilant, managing these risks and conservative in how we run the business, requiring us to be patient and always focused on risk adjusted returns. We pride ourselves in having built the fortress balance sheet over the past decade.

In terms of asset quality, we have been deliberate in managing credit risks in the past as we felt that credit risk was not priced correctly. We are now starting to see this change. We avoided blindly chasing volume growth and I've always believed that sound commercial lending is based on risk adjusted returns, which we have and will constantly revisit with the repricing of risk, repricing of liquidity and always maintaining an overall conservative appetite. A high level view of total assets reflects the highly liquid and secured nature of our balance sheet.

Taking a top down view of total assets, we have approximately EUR 11 billion of assets in cash, representing 20% of the balance sheet, which provides us with significant opportunities if they should arise. Our investment book is approximately EUR 5 billion or 10% of total assets, comprised of 99% investment grade securities, with no Southern European sovereign exposure and no exposures to Russia or Ukraine. We have been underinvested in our securities portfolio for several years. Given the historically low credit spread levels, which we now see repricing and presenting interesting opportunities.

We have EUR 38 billion customer loans, approximately 70% of total assets, focused on developed mature markets. This is split between approximately 73% in the DACH/NL region and 27% within the United States and West Western Europe. Across our customer loans, we have no exposure to Russia, Ukraine or Eastern Europe. We have de minimis exposure to heavy industry and energy intensive businesses. In total, we have under EUR 50 million combined exposure to companies with corporates and SMEs that have existing government guaranteed loans.

For retail and SME assets of EUR 22 billion, comprise approximately 60% of our customer loans, are over 80% secured lending with EUR 16 billion of mortgages between Austria, Germany, Netherlands and Western Europe with a blended LTV in the mid-60s. Almost a quarter of the mortgage book is Dutch and HG mortgages, which are government guaranteed. Our consumer and SME assets are comprised of auto, equipment and real estate leasing, SME secured lending and unsecured personal loans and overdrafts. Our primary focus is lending to prime and near-prime customers in the unsecured space.

Our corporate, real estate and public sector business accounts for approximately EUR 16 billion of assets or 40% of customer loans. Our real estate lending of approximately EUR 6 billion is focused primarily on the United States and Western Europe, representing approximately 80% of the exposure with the DACH region under 20%. We pride ourselves in being very disciplined underwriting when underwriting and having a diversity of underlying assets with over 40% of the underlying collateral being granular with direct residential exposure. The weighted average LTV of the entire real estate portfolio is under 60%. And the NPL ratio is at an all-time low of 70 basis points.

Our public sector lending is approximately EUR 5 billion, is comprised primarily of lending to Austrian federal, state and municipal governments. Our corporate lending of approximately EUR 4 billion is comprised of 2/3 exposure to the U.S. and Western Europe and 1/3 to the DACH/NL region. No different than the securities portfolio, corporate lending has been a challenge over the years as we believe the risk adjusted returns were not sufficient, even with pricing and underwriting standards.

We're now seeing opportunities with the repricing of credit risk and the more disciplined credit standards are being applied. Across both businesses, we have further tightened underwriting standards across the board to address a more volatile environment.

Moving to Slide 6. A snapshot of our funding, capital and earnings profile. Our total funding stack is approximately EUR 46 billion, comprised of EUR 34 billion of deposits or approximately 75%. EUR 6 billion of covered bond funding, EUR 1 billion of senior paper and EUR 6 billion of funding through TLTRO, which we plan to pay down or replace with longer term funding based on opportunities we see in the market. We are fortunate to have a very solid retail deposit franchise, which is the foundation of our overall funding. We have an ability to raise retail deposits if we have been very disciplined about over the years given the negative interest rate environment. We have not passed on any negative rates or fees to our retail customers as a result of the negative interest rate environment over the last 8 years.

We augment our deposit funding with mortgage and public sector covered bonds which we currently have further capacity of approximately EUR 5 billion for funding. Will be disciplined with new issuances, always considering market dynamics, focusing on profitable growth and avoiding unnecessarily inflating our balance sheet. From a capital standpoint, we generate approximately 250 basis points of gross capital annually as we have a highly profitable franchise. Our current CET1 capital stands at 12.7%. Our target CET1 ratio is 12.25% or 311 basis points above our minimum regulatory requirement. Our business is primarily on the standard model methodology with approximately 65% of assets on standard approach. This is a result of having been a late adopter of IRB models, which was partially introduced to the bank in 2012, as well as the adoption of the standard approach from acquired businesses and portfolios. As a result, we have a conservative overall RWA density.

Our overall balance sheet leverage is around 12x to 14x. This represents traditional asset to equity, depending on our cash balance with a regulatory leverage ratio of 5.6%, which reflects the recently announced buyback and dividend accruals. We will always focus on generating returns through risk adjusted pricing and not through leverage. We are fortunate to have a franchise with very strong pre-provision profits and inherently low risk that will allow us to address any severe headwinds while continuing to support our customers and taking advantage of idiosyncratic opportunities that may arise.

On Slide 7. Our retail and SME business delivered net profit of EUR 107 million, up 14% versus the prior year and generating a very strong return on tangible common equity of 33% and a cost income ratio of 34%. Average assets for the quarter were EUR 22 billion, up 10% versus prior year and 4% versus prior quarter. Average customer deposits were EUR 28.1 billion, up 5% versus prior year and flat versus prior quarter. RWAs in the segment were up 17% versus prior year and 8% versus prior quarter resulting from customer loan growth in the purchase of a high quality German consumer loan portfolio.

Pre-provision profits were EUR 170 million, up 20% compared to the prior year with operating income up 12% and operating expenses down 2% resulting from prior year operational initiatives with the continued focus on driving synergies across our various channels and products. Risk costs were EUR 20 million, up 37% versus prior year driven by an incremental EUR 5 million booking of management overlay. The underlying core retail risk cost run rate continues to be approximately EUR 15 million per quarter. The trend in asset quality continues to improve across our customer base with a record low NPL ratio of 1.9%.

We acquired a consumer loan portfolio as part of the Sberbank Europe wind down process, which added approximately EUR 500 million of assets during the second quarter. This was an idiosyncratic opportunity requiring a deep dive underwriting of a German consumer loan portfolio. We underwrote the portfolio to a target return on equity greater than 30%, assuming highly stressed losses and landed at a net profit margin of approximately 4%. We feel very good about the portfolio purchase as this will be highly accretive to the business over the coming years.

Across the business, we will remain prudent and cautious as we've already tightened our credit box in preparation for a period of greater volatility and increased headwinds. We expect continued earnings growth across the retail and SME franchise in 2022. However we see subdued loan growth in the second half of the year, given cautious consumer sentiment, impacts of inflation on daily spending and a wait and see approach to new investments.

On Slide 8. Our corporate, real estate and public sector business delivered net profit of EUR 42 million, up 19% versus prior year and generating a strong return on tangible common equity of 18.5% and a cost income ratio of 22%. Average assets for the quarter were EUR 15.8 billion, up 18% versus prior year. Pre-provision profits were EUR 66 million, up 13% compared to the prior year. Risk costs were EUR 8 million with no reserve releases taken. The trend in asset quality continues to be solid with our NPL ratio of 70 basis points, down 40 basis points versus the prior year.

We continue to see solid and diversified lending opportunities with a strong pipeline and commitments that we expect to fund over the course of the year. We will continue to maintain our disciplined underwriting, focus on risk adjusted returns and avoid blindly chasing volume growth as the markets reprice credit risk, which we believe was long overdue, we have further tightened our credit box and adjusted our risk return criteria given the uncertainty ahead and reflecting our disciplined approach to lending.

With that, I'll hand over to Enver.

[Enver Sirucic, executive]

Thank you, Anas. I will continue on Slide 10. A very strong operating performance in the second quarter, with core revenues up 1% versus prior quarter, with net interest income being up 3% and net commission income down 4% due to a slowdown in the advisory business. With lower operating expenses and higher revenues, our cost income ratio landed below 36% for the quarter. Regulatory charges of EUR 7 million came in a bit higher for the quarter than expected due to the increased contributions to the resolution fund. We booked total risk cost of EUR 30 million in the second quarter, while the underlying asset quality remained strong, we decided to take an additional EUR 6 million of overlay provisions and to increase our total management overlay provisions to EUR 70 million.

On Slide 11, we wanted to show key developments of our balance sheet. In terms of assets, we grew our customer loans by 6%, while our securities book was up 1%, translating into average bearing assets being up 6% for the quarter. Part of that increase was driven by the consumer loan and bond portfolio that we acquired from Sberbank Europe in May. Capital was largely stable versus try quarter, while risk-weighted assets were up 4%, which is in line with the net asset growth. On the funding side, we issued 2 mortgage covered bonds with a volume of EUR 1.5 billion in the second quarter, further improving our liquidity structure and our long-term funding profile.

On Slide 12. Core revenues, strong net interest income, up 3% versus first quarter, driven by high interest-bearing assets, including the acquisition of Sberbank Europe consumer loan bond portfolios in May, net interest margin came down to 225 basis points for the quarter, which will improve with Euribor rate re-fixings on the asset side. It will start materializing in the third quarter. Our interest rate sensitivity remains unchanged with 100 basis points increase in 3 months Euribor, leading to approximately EUR 100 million increase in net interest income per year. Net commission income down 4% as we see a slowdown in our advisory business, given the uncertainty and volatile market environment, which is likely to continue for the rest of the year. Having said that, well, we have a positive view on core revenues for the rest of the year. That is why we updated our outlook from previously over 4% core revenue growth to over 7% growth in 2022.

Moving on to Slide 13. We continue to reduce operating expenses despite significant inflation. Again as mentioned on the prior earnings calls, this is only possible because we have worked on several initiatives over the past 2 years that now allow us to countering these inflationary headwinds. Cost income ratio continued to improve and fell below 36% for the quarter, which is well ahead of our 2022 target of below 38%. We'll also continue to focus on our absolute cost-out target, and we are confident to achieve a net cost-out of around 2% in 2022.

On Slide 14. Risk costs. Overall unchanged conservative and prudent approach on provisioning with stable underlying trends and strong asset quality performance. The underlying core retail risk costs run rate continues to run at around EUR 15 million for the quarter, and the total risk cost ratio is around 20 basis points. The trend in asset quality continues to improve across our customer base with record low NPL ratio of 1.4%. We continue to be very conservative and decided to take an additional EUR 6 million of overlay provisions in the second quarter. The ECL management overlay now stands at EUR 70 million. For the rest of the year, we expect a stable underlying risk cost ratio of around 20 basis points. And in addition, we'll continue to build up the management overlay throughout the year.

On Slide 15. We wanted to reiterate and reaffirm our 2022 targets of a return on tangible common equity of greater than 17% and a cost income ratio of under 38%. As you can see, we have updated our core revenue growth outlook from previously greater than 4% to greater than 7%. Net cost-out of around 2% is unchanged. Regulatory charge is now expected around EUR 55 million, given higher contributions to the resolution fund. And our underlying risk cost ratio is expected to be around 20 basis points, while we will continue to build up additional management overlay reserves throughout the year. Overall unchanged profit before tax outlook of greater than EUR 675 million for 2022.

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

[Operator]

[Operator Instructions] And your first question comes from the line of Mehmet Sevim from JPMorgan.

[Mehmet Sevim, analyst]

I wonder if you could talk a little more about how you balance risk reward in this market environment? We know we've always been conservative and underwrite for returns over the cycle. But at the same time, in the second quarter, there was a lot of growth, you put quite a lot of capital to work, particularly in the corporate segment. So how does this acceleration, particularly in the corporate growth sit with what's currently going on in the world? And maybe could you give some more color on how you're pricing for that risk?

[Anas Abuzaakouk, executive]

Yes. Hello, Mehmet, great question. So of the 5% growth that you saw quarter-over-quarter, just to remind you, right, 1/3 of that was from the portfolio that we bought from the wind down process in Sberbank. So it's about 3.5% of real customer loan growth. And as you mentioned, there was really good activity on the corporates, in particular, the real estate and public sector business. What we've done is, in our credit box, we've gone back to our customers.

The world has changed. If you look at just liquidity costs, we're reflecting that in kind of our risk-adjusted returns. We have a different pricing expectation. And also, even though our risk appetite has been conservative, we've also kind of taken a more cautious view as to what lies ahead, and that's reflected in the overall risk-adjusted pricing.

So I think the combination of those different variables, Mehmet, provides us, I think, with interesting opportunities. And when you have capital and liquidity, and I think when you're disciplined in how you underwrite, I think there's pretty good opportunities that present themselves. What you saw in the second quarter was a pipeline that's built up over the past few months. And rest assured, that was underwritten conservatively and priced, I think, appropriately, at least for our standards.

[Mehmet Sevim, analyst]

Just on that, how is the pipeline looking for the second half? And should we expect similar trends, therefore, in the remainder of the year?

[Anas Abuzaakouk, executive]

Yes. So Mehmet, in the corporate real estate, see, again, more idiosyncratic opportunities. We'll see -- we have commitments, but obviously those need the fund in the world, things are pretty dynamic, but we feel pretty good that the pipeline is robust and we should see that fund through the third and fourth quarter or through the balance of this year. On the retail side, I mentioned it on the -- when we were going through the presentation, there'll be subdued loan growth. We already see it in May and June, and this is a -- there's a lot of factors. I think our customers are cautious. Overall sentiment is cautious. People are, I think, are holding back on investments. So I think you'll see a slowdown in the second half as opposed to the first half in the retail and SME side.

[Operator]

Your next question comes from the line of Johannes Thormann from HSBC.

[Johannes Thormann, analyst]

Two more technical questions from my side, please. First of all, on your risk cost guidance, as you expect the underlying risk costs to be around 20 bps, do you expect or how likely are additional management overlays in the next 2 quarters? And secondly, on your RWA density, you elaborated that you used a standard approach. Was this the main reason for the increase by more than 1 percentage point in the quarter versus last quarter, and this is a new run rate for the RWA density in the next quarter?

[Anas Abuzaakouk, executive]

Hello, Johannes, I'll take the first question, and Enver, maybe you take on the second question. Johannes, when it comes to the risk costs, Enver mentioned that we see underlying 20 basis point risk cost ratio. If you look at the business today and just the trend, the NPL ratio, credit performance is quite robust. We delivered, I think, a really solid second quarter. If you look at it on a first half basis and you extrapolate that, that's about 18% to 19% RoTE. We can afford to be conservative, and we're just -- our nature is to be really cautious. It's not something that we just suddenly started to do. If you look back at 2020, during the pandemic, how we reacted. If you go back over the past decade, we are, by nature, very conservative and cautious, and there's headwinds potentially building up. We just want to be prepared for whatever outcome comes about. And we'll continue to build the overlay and that's just something I think we're fortunate to be able to do.

[Enver Sirucic, executive]

Yes, Johannes, on the RWA density, yes, it changed a bit, but this is really due because of the asset changes, right? So we put on the consumer loan portfolio that carries a high risk rate, plus it was more on the real estate and corporate side, which also carries a high risk rate. But I think rationally, it's right to assume that a similar RWA density going forward.

[Operator]

And your question comes from Gabor Kemeny from Autonomous Research.

[Gabor Kemeny, analyst]

I have a few questions from me. First one is on the gas situation. I mean it's really comforting that you build further overlay provisions in Q2 and you are planning to be a bit further in the second half. But if you think about the negative macro scenarios here, like Russia potentially stopping gas flows to Europe, hopefully, not going to happen, but just in case. Can you give us a sense about how this may impact your provisioning? That would be useful. And the second question would be about the share buybacks. Can you talk a bit about the execution from here? I understand you are planning to complete it by the end of the year. I was just looking at the recent trading volumes of your stock, and it looks like that it might be a stretch, to stay below, let's say, 1/4 of the average trading volumes, if you are planning to complete by year-end. So I guess my question would be, is a tender an option if you're -- if trading volumes won't improve from here?

[Anas Abuzaakouk, executive]

Thanks, Gabor. I will take your first question in terms of, I believe, on just the potential gas cutoff and the impact to the business and how we're preparing. And then Enver, to the extent we can answer just on the buyback. So Gabor, obviously, super relevant. We see the news today. I think that's a partially good news, but we hope this continues.

And first and foremost, obviously, we want to see peace above all else and avoiding kind of geopolitical conflicts. But how we're preparing, Gabor, the way we look at it, we expressed the cutoff of gas really through kind of the GDP scenarios, severe GDP scenarios. So if you look at the ECB severe scenario, first year severe kind of shock, it's minus 1.7%. If you look at the IMF, I think it's minus 2.7%.

And then you have the Bundesbank, which I think is minus 3.2% and if you take those kind of first year shocks, right, at any point in time, this is not about 2022 or '23. I'm just saying kind of at a high level. And you compare that to what we saw during the second quarter of the pandemic when we assumed a first year shock of, I think, minus 12.9%, taking the ECB assumptions. We kind of looked at it in the kind of comparative basis.

And effectively, the risk cost that you had in 2020 were about EUR 225 million, of which about EUR 100 million was ECL. And a lot of that obviously has been carried over from the pandemic by way of a management overlay. So if you had to do kind of bookends and you said, what's your normalized risk cost, EUR 70 million, EUR 80 million, EUR 90 million, whatever you want to use, 15 to 20 basis point risk cost ratio.

And then if you look at 2020, which was kind of at the extreme end using that first year shock, that was about 3x, that normalized risk cost ratio. I think that kind of gives you a sense of how we look at the world. The only difference this time is it's the GDP scenarios, the negative GDP scenarios are less severe. And again, we express it at least at the macro level through the GDP scenario primarily. And we have now EUR 70 million of management overlay going into any potential crisis or headwinds that we have to deal with, which we will continue to build, by the way, in the subsequent quarters.

So we feel we're pretty -- we're doing everything that we can do, everything that we can control. And then there's idiosyncratic risks that we also measure within different parts of the portfolio that we feel we're pretty comfortable with. But all of what we're doing from a provisioning standpoint, Gabor, is trying to prepare for kind of the worst-case scenario and being just super cautious.

We're fortunate that we have a business that generates the type of returns that we have. And we'll be prudent and cautious and conservative in provisioning. And hopefully it never comes about and there's a more normalized environment. But if it does, we're going to be prepared. As I mentioned, I think earlier, we're going to deliver across all cycles, benign as well as volatile. We feel -- I think we're -- this is just a matter of preparing. But hopefully that helps in terms of just some of the ranges that I provided. And Enver, I think there was a question for you.

[Enver Sirucic, executive]

Yes. So Gabor, on the buyback, you're right. I mean liquidity could be higher, obviously. But if you take into account the Vienna Stock Exchange and the MPS, I think we feel quite confident that it's realistic to actually execute a full product by year-end. And even if not, we have the possibility to extend it into the next year as well. So for right now, I don't think that there would be an option for us. So we are still positive, we can execute it until year-end.

[Operator]

The question comes from the line of Mate Nemes from UBS.

[Mate Nemes, analyst]

I have a couple of questions, please. Firstly, on management overlays, I think you've been quite clear that you intend to add to management overlays in the second half, over next couple of quarters. Could you just give us a sense, what magnitude, to what extent should we expect top-ups here? And what exactly would be driving this? Would that be simply based on severe or adverse GDP or macro scenarios? Or could there be perhaps sector-specific overlays as well?

And in terms of the quantum, is the EUR 6 million that you booked in Q2 indicative here? Secondly a question on the upgraded core revenue guidance. Now you expect more than 7% year-on-year growth. If I just look at the first half, you were at 9%. Clearly you've been adding volumes on the corporate side and potentially we could be seeing some tailwinds from rates as well. Is it fair to say that 7%-plus guidance is rather on the conservative side? Or could there be perhaps headwinds that you would be keen to flag?

And the last question is on the Sberbank Europe portfolio. You mentioned that you underwrote it at 30% plus ROE, highly stressed losses and a net profit margin of 4%. Could you perhaps describe what sort of highly stressed losses you're assuming here? Is that 3x normal or that sort of ballpark? And also the -- how your current portfolio compares to that 4% net profit margin? Any color on that would be appreciated.

[Anas Abuzaakouk, executive]

Thanks, Mate. A lot of good questions. I will take the first one on Sberbank and then Enver will address the other questions. The way we look at highly severe losses is we looked at kind of the peak of consumer loan portfolio in the financial crisis. And again, this is a prime, near-prime customer base that we have. And we effectively doubled that from where it was from the kind of financial crisis, peak losses. And that, I think, is reflective of a highly stressed loss assumption that we applied, which we mentioned when we underwrote the portfolio. As it relates to the net profit margin, we don't disclose that. We would just try to provide some color on this particular portfolio, given just the dynamics in the overall environment. So people get comfort with that. We were very diligent in our approach. The other questions, Enver?

[Enver Sirucic, executive]

Yes. So Mate, on the management overlay, it is really more macro driven, just assuming the severe stress assumptions. And on the magnitude, look, I mean, take this quarter, it's probably a good proxy also for the rest of the year. So kind of 5 to 10-ish area is probably what to assume. On the core end of growth, you're right. So there is a lot of tailwinds. You mentioned them, right? We have high interest-bearing assets, rate hikes are in front of us. Maybe just one headwind to consider is the TLTRO. I mean it will roll off. We had it in our numbers. And the question is, what has still to come on that side? But we are, yes, very confident on the 7% plus, and there's a conservative assumption.

[Operator]

[Operator Instructions] And your next question comes from the line of Izabel Dobreva from Morgan Stanley.

[Izabel Dobreva, analyst]

I have 3. The first one is regarding your capital return plans. I have a follow-up, given your commentary around the buyback and your plans to execute it between now and the end of the year. So my question is, what does this mean for the remaining EUR 100 million of capital return from the original commitment? And would you be open to doing a special dividend at the end of the year in order to meet that original distribution plan of EUR 425 million for this year? Then my second question is regarding your risk appetite when it comes to M&A. Because on the one hand you have just bought a consumer business, but then on the other hand your commentary around overlays, buildup signals a degree of caution. So has the M&A pipeline now evolved in line with your plans or the plans that you had at the time when you decided to tranche the buyback? What I'm really trying to understand is whether there has been a change in your risk stance when it comes to appetite for M&A? Or whether we should expect a ramp-up in deal announcements in the second half?

[Anas Abuzaakouk, executive]

Excellent. Okay. Thanks, Izabel. I will take these questions. Let me start with the M&A and then I'll get to the capital distribution. So it's about the Sberbank portfolio, which is a German consumer loans and the bond portfolio, that was idiosyncratic. We did a deep dive on the underwriting that was unique. We tried to give some color as to the level of underwriting and how we priced it to give people comfort.

We feel really good about it. We were not oblivious to the fact that there was a number of headwinds confronting us, and that was reflected in the price, and we think that's going to be highly accretive. The M&A that I was referring to when I was talking about inorganic opportunities during this period would be more akin or more similar to these type of opportunities to buy a bank in this environment to be able to underwrite the entire balance sheet where you're unable to underwrite each individual line item of that particular asset class or asset classes, I think would be pretty challenging.

So I think the things that I mentioned would be more similar to portfolio type opportunities, which we would adjust our risk-adjusted pricing, as I had mentioned. Liquidity costs look different today than they were 6 to 9 months ago. Cost of credit or cost of risk is different and our risk appetite, as I mentioned, we tightened our credit box. So all of that would be reflected, any potential, when we say M&A, a portfolio purchase or asset purchase.

As it relates to capital distributions, A, we need to get the EUR 325 million done, the first tranche. But I also mentioned on the -- when we went through the earnings deck, we'll revisit the second tranche, the EUR 100 million, obviously, that you're referring to as well as any further capital distributions around year-end results. We'll have a better kind of sense of how things have developed based on the overall market, based on our business development in terms of both the organic and inorganic opportunities. And then we'll come back and address any specifics around the second tranche or special dividends or just the overall capital distributions. So just be patient.

[Izabel Dobreva, analyst]

I had a final question to Enver. We've spoken many times before about the composition of the balance sheet and the high percentage of cash and the scope to have more in the investment book. So my question is, how are you thinking about the timing here? And when do you plan to start deploying?

[Enver Sirucic, executive]

I think, Izabel, we are getting to the right levels right now. So we will start investing on the investment book. So you have seen we have deployed a lot of capital in customer loans in the second quarter and the portfolio. And I think you will see a bit more on the investment book in the coming quarters.

[Operator]

We will take our final question, and the question comes from Tobias Lukesch from Kepler Cheuvreux.

[Tobias Lukesch, analyst]

Just a final one on the NIM development basically. Enver, could you give us a sense how that would have developed without the inclusion of the Sberbank asset deal?

[Anas Abuzaakouk, executive]

I think we mentioned it, Tobias, it would be 1.5 percentage points lower. That is pretty much what was attributed to the portfolio. So instead of 5%, it would be 3.5% growth.

[Tobias Lukesch, analyst]

[indiscernible] Enver, the 2.25% rate that we saw in Q2 [indiscernible].

[Enver Sirucic, executive]

Sorry, it's very hard to understand you.

[Anas Abuzaakouk, executive]

Tobias, it's hard to hear you. There's a bit of an echo. Maybe if you can speak up a bit.

[Tobias Lukesch, analyst]

I hope that is better now. Yes, I was referring to the 2.25% NIM. And I was wondering if you could give us a guidance with regards to the usual development without the extraordinary of the Sberbank deal, right, how that would have developed basically?

[Enver Sirucic, executive]

Yes, we don't break that out between organic and inorganic. But I think in general, we -- I think I said it in Q1, I think around 230 is going to, I think, baseline run rate to expect.

[Operator]

There are no further questions. So I hand the call back to the speakers for closing remarks.

[Anas Abuzaakouk, executive]

Thanks, everyone. I hope everybody enjoys the remaining summer period and hope to catch up with you guys during third quarter results. Thanks, and take care. Bye.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.