In the second quarter of 2024, BAWAG Group reported robust financial results and outlined its strategic growth initiatives. The company announced a net profit of €175 million and earnings per share of €2.22, underpinned by a strong operating performance with pre-provisioned profits of €263 million.
BAWAG Group also detailed its acquisition plans, including Knab Bank and Barclays (LON:BARC)' consumer lending business, which are expected to significantly enhance pre-tax profits by 2026 and 2027, respectively.
These acquisitions are projected to consume 250 to 300 basis points of CET1 capital and are pending regulatory approval. The company's CET1 ratio stood at 16.5%, with excess capital of €770 million, and it is set to host a Capital Markets Day in early 2025 to further discuss growth plans and financial targets.
Key Takeaways
- BAWAG Group reported a Q2 net profit of €175 million and earnings per share of €2.22.
- The company's operating performance remained strong, with a return on tangible common equity of 24%.
- Two strategic acquisitions are planned: Knab Bank and Barclays' consumer lending business in Germany.
- These acquisitions are expected to add over €250 million in pre-tax profit by 2027 and are subject to regulatory approvals.
- BAWAG Group aims to increase its DACH/NL footprint and Retail & SME business share to 90% in the mid-term.
- The company has excess capital of €770 million and a CET1 ratio of 16.5%.
- A Capital Markets Day is planned for early 2025 to provide insights into BAWAG Group's growth plans and set new financial targets.
Company Outlook
- BAWAG Group is focused on risk-adjusted returns rather than volume growth.
- The company targets increasing its customer franchise and core revenues to around 90% by mid-term.
- It expects the business to remain steady with slight growth, without purposeful deleveraging.
- Details on future M&A opportunities and branding strategy in Germany were not disclosed.
- The company anticipates the non-core part of the loan book to have mostly run off by the next year.
- BAWAG Group has a good pipeline for loan growth in the corporate sector.
Bearish Highlights
- Some expected deals did not close as anticipated, but normalization is expected in the second half of the year and into 2025.
- Housing loan growth is projected to be muted until 2025.
Bullish Highlights
- The company discussed growth opportunities in domestic and adjacent markets, particularly in the credit card franchise.
- Acquisitions in the Netherlands and Germany are believed to create a dynamic combination for BAWAG.
- The company sets a CET1 target of 12.25% and usually maintains above 13%, with 90 bps earnings generation each quarter.
Misses
- Specific guidance for H2 or the next year was not provided.
Q&A Highlights
- BAWAG Group is focused on integrating recent acquisitions and will provide clarity on their financial impact at the upcoming Capital Markets Day.
- In Ireland, the company is building its platform slowly and methodically, with current mortgage volumes being minimal.
- Deposit costs are expected to move in line with ECB rates, with the average maturity of the deposit base being mostly daily or overnight but behaviorally longer.
In conclusion, BAWAG Group's Q2 2024 earnings call highlighted a solid financial performance and strategic plans for growth through acquisitions and increased market share. The company remains focused on risk-adjusted returns and integrating its recent deals, with a forward-looking approach to its business strategy and capital allocation.
Full transcript - None (BWAGF) Q2 2024:
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: Thank you, Operator. Good morning, everyone. I hope everyone is keeping well. I am 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 €175 million, earnings per share of €2.22, and a return on tangible common equity of 24%. The operating performance of our business was very strong, with pre-provisioned profits of €263 million and a cost-income ratio of 33%. Total risk costs were €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 €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 €96 million. We have a fortress balance sheet with €12.5 billion of cash, an LCR of 220%, and overall strong asset quality. We continue to see a market where customers are cautious and adjusting to higher rates. We closed the second quarter with excess capital of €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 €150 million of pre-tax profit by 2026. In early July, we signed the acquisition of Barclays consumer lending business in Germany, which we forecast to add over €100 million of pre-tax 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 & 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 €4.7 billion of assets comprised primarily of card and loan receivables, of which approximately €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 saving 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's 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 one and is forecast to contribute over €100 million of pre-tax profit by 2027, with EPS accretion greater than 10% without factoring in any future potential buybacks. The transaction is over 2 times 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 & SME business share from approximately 70% today to approximately 90% in the mid-term when considering customer franchise and core revenues. Our strategic focus since our transformation in 2012 has been on growing our Retail & SME franchise, which is 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 right-sizing 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 Volksbank's 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 one and are forecasted to add over €250 million of pre-tax profit by 2027, where both underwritten to a premium of our RoTCE target of greater than 20%, will consume approximately 250 to 300 basis points of CET1 capital and are more than 2 times 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 mid-term financial targets. Moving to Slide 6, we delivered net profit of €175 million, up 5% versus prior quarter and down 3% versus prior year. Overall strong operating performance with total pre-provision profits of €263 million flat versus prior year. Tangible book value per share was €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 €770 million to fund the two strategic acquisitions signed in 2024. On Slide 8, our Retail & SME business delivered a second quarter net profit of €135 million flat versus prior year and generating a very strong return on tangible common equity of 35% and a cost-income ratio of 31%. Pre-provision profits were €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 €25 million. The retail risk costs 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 & 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 €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-income ratio of 23%. Pre-provision profits were €59 million, down 10% versus prior year. Risk costs were €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 €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%, a weighted average lease term of six years with very solid tenants, and an LTV under 75%. With that, I'll hand it over to Enver.
Enver Sirucic: Thank you, Anas. I will continue on Slide 12. A strong quarter with net profit of €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-income ratio at 33%. Risk costs were €28 million in the quarter, slightly lower than prior quarter. ECL management overlay remained at €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 €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 €46.5 billion. Our cash position, as I said before, is now at €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 €16 million or €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 €28 million risk cost in the second quarter, which was slightly below prior quarter. We kept our management overlay at €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 are expected to around €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 €920 million, return on tangible common equity greater than 20%, and the cost-income ratio under 34%. And with that, let's open the Q&A, please. Thank you.
Operator: [Operator Instructions] We will now take your first question, one moment, please. And your first question comes from the line of Vishal Shah from Morgan Stanley (NYSE:MS). Please go ahead.
Vishal Shah: Hi, Anas. Hi, Enver. Hope you 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 €100 million pre-tax guidance? I appreciate you may not be able to give very granular details, but first, in terms of revenue trajectory. So how should we approach that, given you mentioned the focus would be €2 billion credit cards 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 one, for example, at Knab, you paid €80 million to transfer 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 an inferred stuff 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 two quarters. So with sort of rate cuts coming, if you could explain how you reach that 1% guidance, that would be very helpful and also touch upon the deposit behavior there. That's all, thanks a lot.
Anas Abuzaakouk: 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 one. Just to reiterate, it's over €100 million of pre-tax 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 €2 billion in 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 Cap 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 TechOps, 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 with 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: 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 up 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 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 terms of 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 NII trend is going to be stable and that's how we will get to the plus 1% that we guided for.
Vishal Shah: Thank you so much.
Anas Abuzaakouk: Thanks, Vishal.
Operator: Thank you. We will now take the next question. And your question comes from the line of Mate Nemes from UBS. Please go ahead.
Mate Nemes: Yes. Good morning, and thank you very much for the presentation. 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. And the second question would be on Slide 5. You mentioned there that the idea or the strategic rationale of the acquisitions 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 here pre-tax 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? Thank you.
Anas Abuzaakouk: Thank you, Mate. Both very good questions. Let me try -- I'll go ahead, try to answer both questions, and then Enver, jump in if you have some clarifications. I would say on the volumes, Mate, the Retail & SME, it's really two stories. Consumer and SME I think has held up quite well. And when we say consumer and 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 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 declined volumes is on the mortgage side. We see pretty robust on consumer and SME and 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, 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 had term sheets on. And I think that -- hopefully, that will normalize in the second half and going into '25. Your question on I think the overall franchise in 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 mid-term 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 is it deleveraging elsewhere? No, you should assume the business as it is, it's static, slightly growing. And then this combination, as we were able to forecast the 70% to 90% composition.
Mate Nemes: Understood. Thank you.
Anas Abuzaakouk: Thank you, Mate.
Operator: Thank you. Your next question comes from the line of Jan Anders from HSBC. Please go ahead. Oh, just to advise, Jan's line has just disconnected. We will go to the next question. And your next question comes to the line of Gabor Kemeny from Autonomous Research. Please go ahead.
Gabor Kemeny: Hi, a couple of follow up questions from me, please. First one on Barclays. I understand this is early days to comment on the deal in detail. But can you share some thoughts, just qualitatively, what 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 did its 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 trending 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 is still valid. But it would be useful to hear your thoughts on that. Thank you.
Anas Abuzaakouk: Thanks, Gabor. Both good questions. I'll take the Barclays and Enver if you want to address the deposit beta. So the Barclays, Gabor, the -- we keep on reiterating the €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 number two, depending on how you read market share. Number two, 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 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 beta.
Enver Sirucic: Yes. On the deposit betas. Yes, so we are still quite confident that we'll stay below the 35% guidance. I would just mention one thing, obviously, that's before M&A. So with Knab, which we expect closing in Q4, that might change because Knab having a bit higher deposit beta. But on a standalone basis, we feel quite comfortable with the 30% to 35% guidance.
Gabor Kemeny: Thank you. Just a small follow up on this. Have you seen -- what impact have you seen from the government bonds about the bond that shut so far, if any?
Enver Sirucic: Overall, it's quite limited, Gabor. So at the beginning, the first two 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 are seeing on deal basis is de minimis.
Gabor Kemeny: Got it. Thank you.
Operator: Thank you. We'll now go to the next question. And the question comes from the line of Jeremy Sigee from BNP Paribas (OTC:BNPQY). Please go ahead.
Jeremy Sigee: Good morning. Thanks very much. Two questions, please. The first is just continuing on NII. Could you talk about the outlook look 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 you're -- 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: Okay, thanks, Jeremy. Very good questions. Let me start on the capital surplus or what we're going to do with excess capital, and Enver can take the NII. We'll wait till year end, Jeremy, to see kind of where things shake out, but, hopefully, post the deal closings 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: No, I think the same is true for the NII outlook for '25 and '26, something that we'll try to address, obviously, at the year-end '24 or at the Capital Markets Day. But directionally, you're right. So the roll-off of the replication hedge is definitely a positive. So question will be, how many rate cuts do 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 it is. So it's really hard to say, but it will very much depend on the actions set by the ECB.
Jeremy Sigee: Great. Thank you.
Anas Abuzaakouk: Thanks, Jeremy.
Operator: Thank you. Your next question comes from the line of Mehmet Sevim from JPMorgan (NYSE:JPM). Please go ahead.
Mehmet Sevim: Good morning, Anas. Good morning, Enver. Thanks very much. I hope you're well. 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're 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 two 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 one, as guided? Or could there be a small timing gap until we get there? Thank you.
Anas Abuzaakouk: Mehmet, 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 I 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 ZZP, as they call it in 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 one, 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 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 BAWAG 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 and with what they're doing on the front end and originating in great customer focus, I think it's going to be a dynamic combination. Thanks, Mehmet.
Mehmet Sevim: Super. Thank you. And if you could also comment on the capital impact on day one and whether the non-core part of the loan book would have run off by then.
Anas Abuzaakouk: Yes. No, Mehmet. 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 at. The headline figure €4.7 billion versus the €2 billion.
Mehmet Sevim: Super. Thanks very much.
Anas Abuzaakouk: Yes. Thank you.
Operator: Thank you. Your next question comes from the line of Tobias Lukesch from Kepler Cheuvreux. Please go ahead.
Tobias Lukesch: Good morning. And 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 one 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 one 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? Thank you.
Anas Abuzaakouk: Thanks, Tobias. The way to think about that, there isn't any purposeful deleveraging. We got refinanced out of positions. 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 there 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: 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 it really super hard to tell and you're really here flying at site level, basically?
Anas Abuzaakouk: I'd say, Tobias, the housing is more muted that I think you won't see a pickup till 2025 just because you can see the lead times, the pre-approvals, the funding the cycle time. So I think that'll take some time. That's more of a 2025, 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.
Tobias Lukesch: Thank you.
Anas Abuzaakouk: Thank you.
Operator: Thank you. We will now go to our next question. One moment, please. And your next question comes from the line of Noemi Peruch from Mediobanca (OTC:MDIBY). Please go ahead.
Noemi Peruch: Hello, and good morning. So my first question is on capital. So you have a 12.25% common equity target. And we know that Austria is considering adding some national capital requirement buffers. So I was wondering whether you set your target on a MDA buffer or an absolute basis. And then on commercial real estate, we have seen a bit of a reshuffle in the quarter. Higher U.S. 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. Thank you.
Anas Abuzaakouk: 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 €200 million, there's a lot of rounding in that. The €2.4 billion to the €2.6 billion, that was a resi deal, which the credit metrics were phenomenal, and then that hospitality, and that's really the driver. There was no increase in NPL, that was just a denominator effect and you don't see it in the rounding. So when you see from €1.5 billion to €1.6 billion 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's 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 is at. And obviously, an additional conservatism that we might be layering in just given the overall macro environment where we see things heading. So that's on the real estate side. Enver, if you want to take the capital if you want to repeat that.
Enver Sirucic: Sure. Yes. I think, Noemi, if I got the question right, it's how we set the target of 12.25% on a CET1 ratio basis, absolute or MDA buffer? The answer would be both. So, we're looking -- we benchmark with other banks. We'll look at the obviously risk-weighted asset density, asset quality, different business models, and again, we do both. We set 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. Reality is, 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 MD, we have built up another capital on top of it. Given the 90 bps earnings generation each quarter, it reboots quite quickly. And typically, I think -- or usually, we have stayed above 13%, actually, most of the time.
Anas Abuzaakouk: Thanks, Noemi.
Noemi Peruch: Thank you.
Operator: Thank you. We will now take the next question. And your next question comes from the line of Hugo Cruz, KBW. Please go ahead.
Hugo Cruz: Hi, thank you for the time. 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 consensus to be a bit more responsive? Second on -- can you give a bit more clarity on deposit costs? I've seen the comment on the deposit betas, but I think that was mainly more a 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? Thank you.
Anas Abuzaakouk: Thanks, Hugo. I'll do the question on the deals and consensus, and then Ireland, and 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 input 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, 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. 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. But at this point, it's a rounding error. Enver, you want to take the deposit costs?
Enver Sirucic: Yes. So, absolutely right, Hugo. The deposit cost in terms of customer yield remain 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 [Euribor] curve. I didn't get the second part of the question. You said, how long is the or something like that.
Hugo Cruz: 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: 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 move quite in line with that development.
Hugo Cruz: Very good. Thank you.
Anas Abuzaakouk: Thanks, Hugo.
Operator: Thank you. I will now hand the call back for closing remarks.
Anas Abuzaakouk: 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.
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