BAWAG Group AG

VSE:BG

Earnings Call Analysis

Solid Q2 with strategic acquisitions boosting future profits

BAWAG Group reported a robust Q2 with a net profit of EUR 175 million and a 5% increase over the prior quarter. They announced significant strategic moves, including the acquisitions of Knab Bank in the Netherlands and Barclays Consumer Lending in Germany. These deals are expected to add over EUR 250 million in pretax profit by 2027 and require 250-300 basis points of CET1 capital. Despite a slight drop in customer loans by 1%, the group maintains a strong capital position with a CET1 ratio of 16.5% and EUR 12.5 billion in cash reserves.

Strong Financial Performance in Q2

The second quarter results showcased a robust financial performance from the BAWAG Group. The company reported a net profit of EUR 175 million, translating into EUR 2.22 per share, and achieving a return on tangible common equity of 24%. With pre-provision profits of EUR 263 million, the business maintained a low cost-to-income ratio of 33%. However, net interest income saw a slight dip of 1% compared to the previous quarter.

Resilient Balance Sheet

BAWAG Group's balance sheet remains strong with an impressive CET1 ratio of 16.5%, up 90 basis points from the previous quarter. The cash position also increased to EUR 12.5 billion, representing a liquidity coverage ratio (LCR) of 220%. On the flip side, customer loans decreased by 1% quarter-over-quarter, while customer deposits saw a 1% increase.

Strategic Acquisitions Fuel Growth

The group has strategically signed two significant acquisitions in 2024: Knab Bank in the Netherlands and Barclays Consumer Lending Business in Germany. These acquisitions are projected to contribute greatly to profits, with Knab Bank expected to add over EUR 150 million by 2026 and Barclays Consumer Lending EUR 100 million by 2027. These strategic moves are set to consume 250-300 basis points of CET1 capital but are expected to be accretive from day one.

Operational Highlights

In the retail and SME segment, BAWAG delivered a net profit of EUR 135 million, maintaining strong performance year-over-year. The segment achieved a robust return on tangible common equity of 35% and an improved cost-to-income ratio of 31%. Conversely, the Corporates, Real Estate, and Public Sector segment saw a 16% decline in yearly profit to EUR 42 million, emphasizing the resilience of their retail operations despite the challenges.

Credit Performance and Risk Management

Credit performance remained solid across businesses, with a low non-performing loan (NPL) ratio of 1.1%. This is critical given recent macroeconomic uncertainties. BAWAG Group also maintained an ECL management overlay of EUR 80 million and reported risk costs of EUR 28 million, slightly lower than the previous quarter.

Guidance and Future Projections

For 2024, BAWAG Group expects core revenues and net interest income to grow by 1%. Despite an anticipated slow customer loan growth and muted mortgage demand, the company aims to maintain operational expense growth around 3%, excluding M&A costs. Risk costs are projected within 25 to 30 basis points, and net regulatory charges are expected to be around EUR 16 million. The overall profit before tax for 2024 is targeted to exceed EUR 920 million, with a return on tangible common equity over 20% and a cost-to-income ratio under 34%.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the BAWAG Group Q2 2024 Results Call. [Operator Instructions] Please be advised that today's conference is being recorded. There will also be a transcript published on the company's website after the event.

I would now like to hand the conference over to your speaker today, Anas Abuzaakouk, CEO. Please go ahead, sir.

[Anas Abuzaakouk, executive]

Thank you, operator. Good morning, everyone. I hope everyone is keeping well. I'm joined this morning by Enver, our CFO. Let's start with a summary of the second quarter results on Slide 3. During the second quarter, we delivered net profit of EUR 175 million, earnings per share of EUR 2.22, and a return on tangible common equity of 24%. The operating performance of our business was very strong with pre-provision profits of EUR 263 million and a cost income ratio of 33%.

Total risk costs were EUR 28 million, translating into a risk cost ratio of 27 basis points. We did not release any credit reserves with an ECL management overlay of EUR 80 million. We have a low NPL ratio of 1.1% and continue to see solid credit performance across our businesses.

In terms of our balance sheet and capital, average customer loans were down 1% and average customer deposits were up 1% quarter-over-quarter. Our CET1 ratio was 16.5%, up 90 basis points from prior quarter after considering the second quarter dividend accrual of EUR 96 million. We have a fortress balance sheet with EUR 12.5 billion of cash, an LCR of 220% and overall strong asset quality. We continue to see a market where customers are cautious in adjusting to higher rates. We closed the second quarter with excess capital of EUR 770 million, which we are investing in two strategic acquisitions.

In February, we signed the acquisition of Knab Bank based in the Netherlands, which we forecast to add over EUR 150 million of pretax profit by 2026. In early July, we signed the acquisition of Barclays Consumer Lending Business in Germany, which we forecast at over EUR 100 million of pretax profit by 2027.

The two deals will consume approximately 250 to 300 basis points of CET1 capital and are subject to regulatory approvals. We have purposely maintained dry powder to pursue these two strategic acquisitions that will be highly accretive to the franchise and will further position us for continued profitable growth in our core markets within the DACH/NL region focused on retail and SME.

Moving to Slide 4. The acquisition of Barclays german Consumer Lending business will expand our footprint in the German retail banking space and position us for future growth in one of our core markets. The business has been operating successfully in Germany for more than 30 years and is one of the leading providers of credit cards in Germany and Austria.

The business has EUR 4.7 billion of assets comprised primarily of card and loan receivables, of which approximately EUR 2 billion are revolving credit card receivables, which is the primary focus of the acquisition. The business raises deposits via cross-selling to credit card customers and is fully self-funded. This acquisition is a great strategic fit, providing us with a German Consumer Lending Platform focused on credit cards, personal loans, and savings products across a large and diverse customer base.

We will work with the current leadership team to continue growing the business in Germany and Austria, while also exploring potential opportunities in adjacent markets. We believe the combination of the business' leadership and team members with deep credit card expertise, coupled with the operating infrastructure of BAWAG Group, will be a dynamic combination.

We've had a presence in Germany since 2017 when we acquired Südwestbank and subsequently completed small bolt-on acquisitions in the specialty finance space focused on dental factoring and IT and equipment leasing.

The acquisition will consume approximately 140 basis points of CET1 capital. Given the nature of the transaction and the quality franchise we are buying, the deal will be P&L accretive day 1 and is forecast to contribute over EUR 100 million of pretax profit by 2027 with EPS accretion greater than 10% without factoring in any future potential buybacks. The transaction is over 2x more accretive versus pursuing a share buyback. The deal was underwritten with a premium to our RoTCE target of greater than 20%. The transaction is subject to customary regulatory approvals.

Moving to Slide 5. Let me provide a summary of the two deals signed this year and the overall strategic rationale. With the acquisition of Knab Bank and Barclays German Consumer Lending business, we will increase both our DACH/NL footprint as well as our retail and SME business share from approximately 70% today to approximately 90% in the midterm when considering customer franchise and core revenues.

Our strategic focus since our transformation in 2012 has been on growing our retail and SME franchise, just granular, process-oriented and systems-based. Additionally, we have been keen to grow in core Continental Europe, what we refer to as the DACH/NL region given the macro and microeconomic dynamics of the region.

Our focus in the early years of our transformation was rightsizing the business and putting in place the building blocks to grow the franchise. In 2015, we were confident in the strong foundation we had established and executed our first acquisition with the purchase of bausparkasse, Austrian leasing business and have closed 12 acquisitions since that point.

This year, we've signed two strategic acquisitions that allow us to grow in several of our core products across new jurisdictions, focused on current accounts, credit cards, savings products and mortgages. Both acquisitions are expected to be P&L accretive day 1 and are forecasted to add over EUR 250 million of pretax profit by 2027. We're both underwritten to a premium of our RoTCE target of greater than 20%, and will consume approximately 250 to 300 basis points of CET1 capital and are more than 2x more accretive than share buybacks when using the average of our share price during the first half of 2024.

We have been making good progress with the Knab Bank integration and are on track for an expected closing in the fourth quarter of this year, of course, subject to final regulatory approvals.

The closing of Barclays Consumer Bank Europe is anticipated for the fourth quarter of this year or first quarter of 2025. Given the size of the acquisitions, we are planning to host a Capital Markets Day in early 2025, once both acquisitions have closed. Our goal would be to provide greater insights into our growth plans, a refresh of our strategic pillars and to set new midterm financial targets.

Moving to Slide 6. We delivered net profit of EUR 175 million, up 5% versus prior quarter and down 3% versus prior year. Overall, strong operating performance with total pre-provision profits of EUR 263 million, flat versus prior year. Tangible book value per share was EUR 37.20, up 15% versus prior year and 2% versus prior quarter. This assumes the deduction of the dividend accrual.

Moving to Slide 7. At the end of the second quarter, our CET1 ratio was 16.5% after deducting the dividend accrual. For the quarter, we generated approximately 90 basis points of gross capital through earnings. In addition, risk-weighted assets were down due to lower volumes in the corporates. We plan to invest our excess capital of EUR 770 million to fund the two strategic acquisitions signed in 2024.

On Slide 8, our retail and SME business delivered a second quarter net profit of EUR 135 million flat versus prior year and generating a very strong return on tangible common equity of 35% in a cost-to-income ratio of 31%. Pre-provision profits were EUR 206 million, up 4% compared to the prior year, with operating income up 5% and operating expenses up 7% versus prior year.

Risk costs were EUR 25 million. The retail risk cost run rate has now returned to pre-COVID levels as multiple stimulus and government support programs have now expired. However, we continue to see solid credit performance across the business with an NPL ratio of 1.9%. We expect continued earnings growth across the retail and SME franchise in 2024, driven by strong operating performance and on the back of ongoing strong fee income.

We expect muted customer loan growth this year given the overall economic environment and subdued demand for mortgages.

On to Slide 9. Our Corporates, Real Estate, and Public Sector business delivered second quarter net profit of EUR 42 million, down 16% versus prior year and up 8% versus prior quarter, generating a strong return on tangible common equity of 24% and a cost-to-income ratio of 23%. Pre-provision profits were EUR 59 million, down 10% versus prior year. Risk costs were EUR 2 million. We continue to see solid credit performance across the business with an NPL ratio of 80 basis points.

We pride ourselves on disciplined underwriting, focusing on risk-adjusted returns and not blindly chasing volume growth as we continue to remain patient and disciplined. We have the capital and liquidity to support our customers as we expect markets to normalize in the next few quarters.

On Slide 10, an update on the real estate portfolio, which remained stable this quarter. The portfolio continues to perform well, reflecting the underlying exposure to residential, logistics and industrial assets, which make up 66% of the total real estate portfolio and 77% of our total U.S. exposure.

Our office exposure in the United States stands at EUR 375 million, slightly up versus prior quarter, which is solely related to FX movements. The performing U.S. office portfolio represents less than 1% of total customer loans and 6% of our total real estate exposure. The remaining U.S. office portfolio has a debt yield of approximately 9%, occupancy levels of approximately 80% and a weighted average lease term of 6 years with very solid tenants and an LTV under 75%.

With that, I'll hand it over to Enver.

[Enver Sirucic, executive]

Thank you, Anas. I will continue on Slide 12. A strong quarter with net profit of EUR 175 million and a return on tangible common equity of 24%. While net interest income was down 1% versus prior quarter, the net commission income remained ongoing strong, up 1% in the second quarter. Year-over-year, core revenues were up 1% and flat versus prior quarter.

Operating expenses up 1% in the quarter and cost-to-income ratio at 33%. Risk costs were EUR 28 million in the quarter, slightly lower than prior quarter. ECL management only remained at EUR 80 million.

On Slide 13, key developments of our balance sheet. A few things I would highlight here. Customer loans were down 3% in Q2 and 4% year-over-year. This was largely driven by the Corporates business. Our customer deposits were up 1% quarter-over-quarter. Our cash position increased to EUR 12.5 billion this quarter. Cash and cash equivalents make up approximately 23% of our balance sheet, leaving us with a very comfortable liquidity buffer to address potential organic and inorganic market opportunities in the coming quarters.

Moving on to next slide, our customer funding, which is made up of customer deposits and AAA-rated Mortgage and Public Sector covered bonds grew by 1% versus prior quarter to around EUR 46.5 billion. Our cash position, as I said before, is now at EUR 12.5 billion.

In terms of customer deposits, no relevant structural changes in the second quarter. Repricing continued in line with our expectations and overall deposit betas are now at around 32%. We expect deposit betas to stay between 30% to 35% in 2024.

With that, moving on to Slide 15, core revenues. Net interest income was down 1% versus prior quarter, with a net interest margin of 300 basis points. Overall, we have seen lower volumes in the business and a pickup of deposit betas from 29% to 32%, leading to slightly lower net interest income. In terms of net commission income, up 1% with an overall good performance across securities and payments in our Retail & SME segment. For 2024, our guidance remains unchanged. We expect core revenues and net interest income to grow by 1%.

On Slide 16, operating expenses are up 1% versus prior quarter largely driven by the collective bargaining agreement for banking having been finalized in March. We expect to offset the largest part of inflationary increase through further simplification measure and therefore, expect a cost increase of around 3% for 2024 before any M&A. Our expectation for regulatory charges in 2024 remains at around EUR 16 million or EUR 4 million per quarter for the remainder of the year.

Moving to Slide 17, risk costs. Overall, continued strong asset quality with a low NPL ratio of 1.1%. We booked EUR 28 million of risk costs in the second quarter, which was slightly below prior quarter. We kept our management overlay at EUR 80 million. We expect risk costs in 2024 in the context of 25 to 30 basis points.

On Slide 18, we reconfirm our outlook and targets for 2024. This is based on current interest rate expectations and assuming no M&A in 2024. We are targeting net interest income and core revenue growth in '24 of 1%, while containing operating expenses to around 3% growth. Foreseeable regulatory charges, I expect to around EUR 16 million in '24. Based on overall macro environment, the recent underlying trends and solid asset quality, the risk cost ratio is expected to be between 25 and 30 basis points. The financial target for 2024 is a profit before tax greater than EUR 920 million, return on tangible common equity greater than 20% and the cost-to-income ratio under 34%.

And with that, let's open the Q&A, please. Thank you.

[Operator]

[Operator Instructions] And your first question comes from the line of Vishal Shah from Morgan Stanley.

[Vishal Shah, analyst]

Hoping both are doing well and thanks a lot for the presentation.

So first one is on the Barclays deal. Can you run us through the rationale on how you got to that greater than EUR 100 million pretax guidance? I appreciate you may not be able to give very granular details. But first and then in terms of revenue trajectory. So how should we approach that given you mentioned the focus would be the EUR 2 billion credit card portfolio?

And then on the cost side, is there anything to highlight in terms of low-hanging fruit, for example, that could be taken out on day 1, for example, like Knab, you paid EUR 80 million funds for the mortgage servicing ownership. So any similar type of effects we should be aware of there? So that's my first question.

And the second one is more on NII. You generated in the first half based on what you generated and your 1% Y-o-Y guidance, it seems like you will need to see stable NII for the next 2 quarters. So with sort of rate cuts coming, if you could explain how you reached that 1% guidance, that would be very helpful and also touch upon the deposit behavior there? That's all.

[Anas Abuzaakouk, executive]

Thank you, Vishal. Very good questions. I will take the Barclays deal, and then Enver, you can address the NII. So Vishal, please do understand, it's -- we've just signed, we're going to provide more details during the Capital Markets Day in terms of integration plans, kind of the go-forward approach towards the platform. But I can say more broadly, it's P&L accretive day 1. Just to reiterate, it's over EUR 100 million of pretax profit in 2027. And as it comes to just when you think about revenues and costs, we've mentioned the credit card business, which is about EUR 2 billion of receivables, that's going to be the core franchise.

So I think, just thinking about revenues, you should think about in the context of the credit cards. And as far as operating expense, which again, we'll provide more details hopefully, in the Capital Markets Day once it's closed. There's been really intense work with the Barclays team in Hamburg, just thinking through the integration, they do a great job in terms of originating, understanding their diverse large customer base, I think we're going to be able to couple that with a really strong operating infrastructure when it comes to tech ops, when it comes to system migrations, when it comes to third-party service agreements.

And that's, I think, where we're going to see a lot of the opportunity set when it comes to the operating expenses, coupled with, I think, what they've done on the front end or the originations plus with the strong risk culture that they have. So it's probably not the exact answer that you want, but just to kind of give you some broad outline or contours as to where the integration is going to focus on.

And I'll pass it over to Enver to discuss the NII.

[Enver Sirucic, executive]

Thanks for the questions, Vishal. So on the NII, I think you're right. So we would expect quite a stable trend for the rest of the year. what we expected, if you break it out into two components, what we expected at the beginning of the year, we said the NIM for '24 is going to be very similar to the NIM in '23, which was 290 basis points on average. We are trending better than that. As you could see, we are closer to 300 basis points in the first half. But the offset to that is that the customer loan growth is not as expected. So we're a bit behind on the customer loan growth. So it will all depend on how the second half looks in term on customer loan development.

On NIM, I think we feel quite comfortable. So in context of both, we think it's fair to say that the trend is going to be stable, and that's how we will get to do the plus 1% that we guided for.

[Operator]

And your question comes from the line of Máté Nemes from UBS.

[Mate Nemes, analyst]

I have two questions, please. The first one is still on volumes. So you mentioned the NII development year-on-year will also depend on volume development in the second half, which is fair enough. I was wondering if you could unpack a little bit your expectations, particularly on Retail & SME in terms of loan growth, primarily what you're seeing, what you're expecting in residential mortgages in Austria, Germany and perhaps Netherlands. Are you seeing any meaningful pickup? Any color on that would be helpful.

The second question would be on Slide 5. You mentioned there that the idea or the strategic rationale of the acquisition is to increase your DACH/NL and Retail & SME footprint to around 90% midterm. Could you give us a bit more color on this whole transition? Do we need to look at your pretax profit? Is that revenues? What do you exactly have in mind? And also, should that higher share or higher contribution of Retail & SME simply be the result of the acquisitions and perhaps the natural runoff in perhaps part of real estate lending and maybe part of the non-DACH/NL corporate business?

[Anas Abuzaakouk, executive]

Thank you, Máté. Both very good questions. Let me try -- I'll try to answer both questions and then Enver jump in if you have some clarifications. I would say on the volumes, Máté, the Retail & SME, it's really two stories, Consumer & SME, I think, has held up quite well. And when we say Consumer & SME, that is auto leasing, IT equipment leasing, that is personal loans across the different jurisdictions that we're in. So that we see, I think, good demand.

The mortgage business, in particular, if you look at kind of just overall mortgage volumes in the key jurisdictions, but if we just focus on Austria being the main kind of hub, those volumes are down pre kind of rising rates, almost 50% across this kind of at a system level.

And given just our margin focus and being disciplined, that also puts some constraints. So we don't see that, we think that's going to be pretty muted for the second half of this year. And hopefully, we'll start to see a normalization in 2025. But that is the biggest driver when it comes to muted volumes or decline volumes is on the mortgage side, we see pretty robust on consumer and SME. We think that will continue.

As it relates to Corporates, Real Estate, Public Sector. Public Sector, we see good opportunities, that's more idiosyncratic. Corporates, we actually had a lot of redemptions, early redemptions on a number of facilities. And we think that's going to be idiosyncratic. We have a pretty good pipeline. But we're never going to -- I have to reiterate this, we'll never chase volume growth for the sake of just growth, because of just the movements within intra-year or between quarters.

If there's good risk-adjusted returns, we'll be there with capital and liquidity to support our customers. If it doesn't meet our risk-adjusted returns, we're going to be patient. And that's kind of defined how we've approached lending in general and specifically as it relates to corporate real estate and public sector. It's not any purposeful deleveraging, and that's not what you should read into any of this. And we think just given what we're seeing in the market, some deals, unfortunately didn't close that we have term sheets on. And I think that hopefully, that will normalize in the second half and going into '25.

But your question on, I think, the overall franchise in the DACH/NL the way to look at that, and we'll provide more details during the Capital Markets Day, because I think we can provide more specificity on the businesses. But you should see that as customer franchise, which is your customer assets as well as your customer deposits and funding, what we call a customer franchise as well as the core revenues. And that today, when you kind of look at that holistically is around 70%, probably a little higher than 70%. And that -- our target by midterm will be around 90%. But I think we'll be able to give more details on that.

And then, I think, you were asking, is it just a combination of the deals and/or is the deleveraging elsewhere? Now you should assume the business as it is a static, slightly growing, and then this combination as we were able to forecast the 70% to 90% composition.

[Operator]

Your next question comes from the line of [ Jan Anders ] from HSBC. Just to advise Jan's line has just disconnected. We will go to the next question.

And your next question comes from the line of Gabor Kemeny from Autonomous Research.

[Gabor Zoltan Kemeny, analyst]

A couple of follow-up questions from me, please. First one on Barclays. I understand this is early days to comment on, on the deal in detail. But can you share some thoughts just qualitatively what do you see like distinctly differently from Barclays, when you talk about reducing a large part of this portfolio? I mean, Barclays was experienced in the German market, presumably didn't own cost benefit analysis on these portfolios. Yes, it would be useful to understand what you see differently, especially outside of the credit cards.

My other question would be, again, a follow-up on the deposit beta, which has been standing up, I believe, 25% in Q4, 29% in Q1 and then 32% in Q2. I guess, what do you think is the likelihood that we will see readings above the 35% mark by the end of the year? I understand the 30%, 35% average guidance would be valid. But, could you give your thoughts on that?

[Anas Abuzaakouk, executive]

Thanks, Gabor. Both good questions. I'll take the Barclays and then Enver, if you want to address the deposit beta. So the Barclays, Gabor, we keep on reiterating the EUR 2 billion of credit card because that is the core franchise. Obviously, we'll continue to do personal loans. We will focus on certain channels, not to get into the specifics now. But what really underpins the transaction is their experience in the credit card business. They've been doing it for 30 years, very strong leadership team, really deep credit card expertise across the organization. Their ability to originate credit cards, I think, is quite unique.

They're #2, depending on how you read market share, #2 credit card provider in Germany, as to how we kind of analyze it. So we think there's a lot to do on that front. It's not to say that the personal loans is not something we're going to pursue. But really, the core of the franchise is the credit cards. And the personal loans are a fairly short weighted average life that turn over fairly quickly, and we're going to look at certain channels that we'll pursue the personal loans on.

I'll go ahead and pass it to Enver for the deposit betas.

[Enver Sirucic, executive]

Yes. On the deposit betas, yes. So we are still quite confident that we'll stay -- go with the 35% guidance. I would just mention one thing. Obviously, that's before M&A. So with card, which we expect closing in Q4, that might change because card having a bit higher deposit beta. But on a stand-alone basis, we feel quite comfortable with the 30% to 35% guidance.

[Gabor Zoltan Kemeny, analyst]

Just a small follow-up on this. Have you seen -- what impact have you seen from the government point about the bond that shut so far? If any.

[Enver Sirucic, executive]

Overall, it's quite limited, Gabor. So at the beginning of the first 2 weeks, we have seen a bit of outflows, nothing relevant to that product, which is a good product overall. But it has declined significantly since then. So it was just the first couple of weeks. Now it's what we're seeing on deal basis is de minimis.

[Operator]

We will now go to the next question, and the question comes from the line of Jeremy Sigee from BNP Paribas.

[Jeremy Sigee, analyst]

Two questions, please. The first is just continuing on NII. Could you talk about the outlook for 2025 and 2026, obviously, expecting rate cuts, but there should be quite a significant benefit from your hedges rolling over. So that could actually net to quite a nice positive. I just wondered if you could talk about that a little bit.

And then the second question sort of fairly obvious one just on you're flagging the very large amount of surplus capital, which is likely to grow further by year-end and probably only about half of it gets eaten up by your acquisition. So I just wondered how your -- it's at an early stage, but how you might be thinking about possible additional capital returns around year-end if that sort of capital surplus is confirmed and only partly used up by these acquisitions.

[Anas Abuzaakouk, executive]

Okay. Thanks, Jeremy. Very good questions. So let me start with the -- on the capital surplus or what we're going to do with excess capital. Then, Enver can take the NII. We'll wait until year-end, Jeremy, to see kind of where things shake out hopefully, post the deal closings at year-end and then obviously, the year-end reporting will be in February. I think we'll have more clarity as to the overall excess capital situation. I think we'll be better positioned to have those discussions. It's just the plate is full at the moment, but we are not oblivious to the fact that the excess capital generation is quite significant on a quarterly basis. So hopefully, we will address it then. Enver?

[Enver Sirucic, executive]

I think, Jeremy, it's true for the NII outlook for '25, '26, something that we'll try to address, obviously in Q1 '24 or at the Capital Markets Day. Directionally, you're right. So the roll-off of the replication hedge is definitely a positive. The question will be how many rate cuts do, will we see based on ECB action. The more and the quicker they happen, the more negative it is, the longer they take the more positive. So it's really hard to say, but it will very much depend on the actions set by the ECB.

[Operator]

Your next question comes from the line of Mehmet Sevim from JPMorgan.

[Mehmet Sevim, analyst]

I have just a couple of questions on Barclays and one on capital, please. So just on M&A opportunities and Barclays essentially, you mentioned you are more excited about future growth opportunities than ever before. This is what you're writing in the press release. If I can -- if I think about the organic growth potential of these two businesses that you're acquiring from day 2 onwards, relative to the rest of the group. Could you give us any color on that? And any early thinking that you may have at this stage when the acquisitions close?

And just on Barclays also, can I ask under what brand you're planning to operate in Germany, especially given I think they did have quite a strong brand name there. If you would see any risks related to that from the closing onwards? And one final one on this one. You mentioned that you expect to close the transaction in the fourth quarter or the first quarter of next year. Would you expect the non-core part of the loan book to have completely run off by then, so that the capital impact is 140 basis points on day 1 as guided? Or could there be a small timing gap until we get there.

[Anas Abuzaakouk, executive]

Thanks. Great questions. I'll take this and Enver, feel free to jump in. As it relates to the organic opportunities for both Knab and Barclays, what's exciting in the comment that have made in the release and with how the team feels is, in both situations in Knab, you have a current account payments business for almost 400,000, 500,000 customers that has a strong presence with the self-employed, the GGP as they call it, in the Netherlands, which is a strong growth area.

The way we underwrote the business was very conservative. We think there's going to be a lot more opportunity for growth. But I think in past M&A, the way we've approached things is be very conservative in the underwriting, and then obviously do everything we can to grow the business and provide it with the investments and the operating support from the group. And that's what we intend to do.

But the day 1, the financials that we have reflected takes a more conservative approach, right? But that's not to say that we're not going to be growing the business quite frankly, I think these are two really dynamic opportunities where we see a lot of growth potential, both domestically and then potentially in adjacent markets.

The same for Barclays. Really, that's focused on the credit card franchise. That's -- they have a very strong position. They operate already in Austria. We are a credit card provider more on the issuing side as far as the charge cards as opposed to revolvers, but -- that's something that we think will be synergistic, plus there's opportunities in adjacent markets. And when I say adjacent markets and the opportunities, those are not factored into any of our numbers. That's just something that we think down the road will provide hopeful potential for growth.

And then on the brand, there's going to be a transition. I think it's early right now to kind of communicate anything. We'll do that in the Capital Markets Day. But you should assume there's a transition, obviously, away from the Barclays brand, which is a very strong brand, well recognized in the market, to one of the power brands. But I think it's premature to address that now. But we're very excited.

I think there were great acquisitions, great teams, both in the Netherlands as well as in Germany. Great market presence and position. And I think with our operating infrastructure with what they're doing on the front end and originating a great customer focus, I think it's going to be a dynamic combination.

[Mehmet Sevim, analyst]

If you could also comment on the capital impact on day 1 and whether the non-core part of the loan book would have run off by then.

[Anas Abuzaakouk, executive]

Yes. On that -- the weighted average life is fairly short, given just kind of fourth quarter, first quarter, I think you'll see a big part of that addressed in terms of the P loans, which we'll do, obviously, in the future, but through different origination channels. So I think that will make -- that will account for the biggest gap in terms of what we're buying versus what we're going to close out. The headline figure EUR 4.7 billion versus the EUR 2 billion.

[Operator]

Your next question comes from the line of Tobias Lukesch from Kepler River.

[Tobias Lukesch, analyst]

I would like to touch on one question, the loan growth, again, you highlighted that there was a lot of redemption basically in the corporate space, and you're quite muted in terms of H2 at the same time, you pointed to a good pipeline. I was just wondering how you see especially loan growth in the corporate area which kind of benefited the quarter 1 ratio beat that you have shown today with 50 bps basically. Should we think that this corporate portfolio is going to rise again in H2 or also earlier next year, i.e., then have a bit of a kind of dampening impact on the quarter 1 ratio development and the excess capital development or would you rather think that you keep the corporate portfolio at a level where we are thinking 12 months ahead?

[Anas Abuzaakouk, executive]

Thanks, Tobias. The way to think about that, there isn't any purposeful deleveraging. We got refinanced out of physicians. I think that when you think about CET1 development, 90 basis points of gross capital generation just through earnings. I think that's the more impactful statistic. The 50 basis points reduction because of RWAs, I think that was a bit of an anomaly in the second quarter. We have a good pipeline, but there isn't a situation where I can tell you this is the volume that we're going to put on in the second half or in 2025.

It's really situational and idiosyncratic. If there's a good deal or if there are good deals in terms of lending that have great risk-adjusted returns, I think we've demonstrated that we have the capital and liquidity to be able to deploy that. But we'll be patient. So I know it's not answering your question if you probably want something specific. But I think we have a stronger pipeline in the second half than the first half. But a deal is not done until it's done, and we'll see how things develop. So I think the more important factor or metric to look at is the gross capital generation through earnings, which I think is the real engine for CET1 growth.

[Tobias Lukesch, analyst]

Absolutely. Maybe if I may, you mentioned basically the housing loans, right? And this is really making the impact in the Retail & SME segment. I was just trying to get a feeling like if you're a bit more upbeat on potential growth or positive growth impact from the housing market, which is down so much or rather the corporate space? Or is that really super hard to tell and you really hear flying at site level basically?

[Anas Abuzaakouk, executive]

I'd say, Tobias, the housing is more muted that I think you won't see a pickup until 2025 just because you can see the lead times, the pre-approvals, the funding, the cycle time. So I think that will take some time. That's more of 2025, hopeful, and that's going to be also at a macro level. And that, quite frankly, is tied to also the velocity of rate cuts.

As far as the Corporates, that's more idiosyncratic and that you could have early redemptions or you can have a strong pipeline that emerges over a few months. So that's harder to predict.

[Operator]

And your next question comes from the line of Noemi Peruch from Mediobanca.

[Noemi Peruch, analyst]

So My first question is on capital. So you have a 12.25% common equity target. And we know that Austria is considering adding a -- making national capital requirement buffers. So I was wondering whether you set your target on an MDA buffer or on absolute basis? And then on commercial real estate, we have seen a bit of reshuffle in the quarter, as higher US residential hospitality and lower European residential and also an uptick in NPL ratio. So if you could just walk us through your -- the moving parts here and your appetite on new production towards the various categories?

[Anas Abuzaakouk, executive]

Thanks, Noemi. I'll take the real estate question, and Enver, if you could take the capital question. I wasn't sure I heard it also clearly, so you might have to repeat it Noemi, but just on the real estate, fairly steady. The EUR 200 million, there's a lot of rounding in that, the EUR 2.4 billion to the EUR 2.6 billion. That was a resi deal, which -- the credit metrics were phenomenal and then hospitality. And that's really the driver. There was no increase in NPLs that was just a denominator effect. And you don't see it in the rounding. So when you see from 1.5 to 1.6, you shouldn't read anything into it. It's the same NPL volume from the prior quarter.

That's just the overall denominator effect as far as the absolute numbers. But the opportunities that we see in the U.S. are few and far between, quite frankly, customers are -- I think everybody is a bit frozen. Europe, we've been refinanced out of a few positions this year, but we'll be disciplined. But if there's great lending opportunities, we're in no way deleveraging. It's just we're reacting to where the market's at. And obviously, an additional conservatism that we might be layering in, just given the overall macro environment and where we see things heading. So -- that's on the real estate side. Enver, do you want to take the capital, if you want to repeat that?

[Enver Sirucic, executive]

Yes, sure. Yes. I think, Noemi, if I get the question right, it's how we set the target of 12.25% on a CET1 ratio basis, household or MDA buffer. The answer would be both. So we both -- we benchmark with other banks. We'll look at the -- obviously, our risk-weighted asset density, asset quality, different business models. And again, we do both.

We said it on an absolute level, which we think is in line with our business model and our risk profile. And also we look at this MDA buffer, so management buffer approach as well. Realities, if you look back, I don't remember we ever came close to that target. The reason for that is we assess everything at year-end. And by the time something happens, be it dividends, buybacks or MDA, we have built up another capital on top of it, giving the 90 bps earnings generation each quarter, which rebids quite quickly. And typically, I think -- or usual, we have stayed about 13% actually most of the time. Thank you.

[Operator]

And your next question comes from the line of Hugo Cruz, KBW.

[Hugo Moniz Marques Da Cruz, analyst]

I have three questions, if I may. First, on the two deals. I mean, I think it's quite clear that consensus is still not reflecting these deals in their estimates. Will you be able to provide more details ahead of the Capital Markets Day so that we don't have to wait so long for the consumers to be a bit more responsive.

Second, on -- can you give a bit more clarity on deposit costs? I've seen a comment on the deposit betas, but I think that was mainly more benchmark rate effect. I think deposit costs are probably more or less stable. But how do you expect deposit costs to evolve for the rest of the year? And what's the average maturity of your deposit base?

And third, if you could talk a bit about what you're doing -- what's the latest you're doing on Ireland there? What kind of volumes do you expect to see coming out of Ireland in mortgages?

[Anas Abuzaakouk, executive]

Thanks, Hugo. I'll do the question on the deals and consensus and then Ireland and then Enver, I'll pass it over to you on the deposits. So Hugo, it's out of our control what goes into the analyst estimates, we've tried to provide as much clarity up to this point anyways as to the accretion from the deals, both in terms of versus a buyback as well as obviously the forecasted pretax profit contribution, the timing. We will hopefully be able to give you more clarity on the deals, the integration plans, the annual contributions at Capital Markets Day.

From here to Capital Markets Day, obviously, if there's developments on the integration front, we'll be able to share that with you. But I think we've given broad strokes now that people can work with, whether they can put it into their models. I mean that's out of our control. So -- but I understand your question.

And then on Ireland, really slow methodical approach, building a good platform there, the [ MoCo ] platform, a really good team that we have on the ground. We're just going to be patient, right? We're disciplined when we look at the market -- we like the macro fundamentals of Ireland in terms of supply/demand. And there's an acute shortage of housing that we think in due course, we're going to be able to hopefully provide financing for customers and for new house form creation -- new home creation and providing -- being one of the many banks that provide financing there. So -- but the volumes, to answer your question, are very de minimis at this point. And then we'll start to reflect what those volumes are in due course when it makes sense. So -- but at this point, it's around in Europe.

Enver, do you want to take the deposit cost?

[Enver Sirucic, executive]

Yes. So absolutely right, the deposit cost in terms of customer yield remained pretty much flat compared to Q1. So it's really coming from the denominator effect, as you said, because of the rate cut in the front running of the [ River ] curve. I didn't get the second part of the question. You said how long is to or something like that?

[Hugo Moniz Marques Da Cruz, analyst]

Yes. How do you expect deposit costs to evolve in the rest of the year? And what's the average maturity of the deposit base?

[Enver Sirucic, executive]

So most of it contractually is really daily or overnight deposits, but behaviorally, obviously, longer. So I think we would expect it to move in line as much as possible with the ECB rates. So it will depend if there are a few more rate cuts or less for the rest of the year. But the idea is actually to both quite in line with that development.

[Operator]

Thank you. I will now hand the call back for closing remarks.

[Anas Abuzaakouk, executive]

Okay. Thank you, operator. Thank you, guys, for attending the call. Thank you to the analysts for great questions. We look forward to catching up in the third quarter and hopefully provide more updates. All the best. Have a great summer. Take care.

[Operator]

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.