BAWAG Group AG (BG) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the BAWAG Group Q2 2026 Results Call. [Operator Instructions] Please be advised that today's conference is being recorded, and there will also be a transcript on the company's website. I would now like to hand the conference over to your first speaker today, Jutta Wimmer, Head of Investor Relations. Please go ahead.

Good morning, everyone. Before we started with the call, let me remind you of the following: As you know, on 14 April, we announced that BAWAG entered into a recommended transaction to acquire 100% of PTSB. That transaction remains ongoing and is subject to shareholder, high court and regulatory approvals. As the transaction is regulated by the Irish takeover rules, we are restricted in the information we can provide on this call. And as a result, we will not take any questions in relation to the PTSB transaction. With that, I will hand over to Anas, our CEO.

Thank you, Jutta. I hope everyone is keeping well. I'm joined this morning by Enver, our CFO. Let's go ahead and get started with a summary of second quarter results on Slide 3. We delivered net profit of EUR 255 million, EPS of EUR 3.28 and return on tangible common equity of 29% during the second quarter. The operating performance of our business remains very strong with core revenues of EUR 590 million, up 8% versus prior year, preprovision profits of EUR 413 million and a cost-income ratio of 31%. We continue to realize the benefits of investments over the years as we build out a pan-European and U.S. banking group. Total risk costs were EUR 75 million, translating into a risk cost ratio of 54 basis points. We have a low NPL ratio of 90 basis points and continue to see solid credit performance across our businesses. In terms of our balance sheet and capital, average customer loans and average customer funding were flat quarter-over-quarter. We have a fortress balance sheet with EUR 14.5 billion in cash equal to approximately 20% of our balance sheet, an LCR of 217% and overall strong asset quality. During the first half of the year, we worked diligently to ensure we positioned ourselves to fully self-fund the PTSB transaction. For the first half of the year, we landed on a CET1 ratio of 17.4%, translating into over EUR 1 billion of excess capital and 40 basis points above the target CET1 ratio of 17% (sic) [ 17.4% ] required to self-fund the deal. We remain incredibly excited about the opportunity to acquire PTSB, which represents a pivotal step in our commitment to the Irish market. We started this process in November 2025 when we made a strategic decision to enter the announced public auction. We spent 6 months performing due diligence as part of a highly competitive in public auction process that required thorough analysis, planning and coordination to put our best foot forward. Post the announcement of the transaction, we have been working hard to prepare ourselves and have spent significant amount of time with regulators, the PTSB Board and other stakeholders to introduce ourselves, our business and outlining our plans in Ireland. We look forward to the next milestone with the PTSB shareholder vote scheduled at the end of the month and subject to the satisfaction of the remaining conditions, expect the closing of the transaction in the fourth quarter of this year or the first quarter of 2027. If the PTSB transaction is approved, this will represent our 15th acquisition since 2015 as M&A is a key plank of our strategy. In that time, we have always prided ourselves on being a serious, committed and disciplined buyer. PTSB would represent our first public company acquisition with different dynamics, but never changing our approach. We hope to capture all the learnings over the past decade to ensure a successful integration, leveraging best practices as we continue to adapt and improve our approach. The trust and confidence placed in us by the PTSB Board, the Minister for Finance of Ireland as the bank's majority shareholder and long-term shareholders who supported PTSB over the years is something we take very seriously and are keen to demonstrate our capabilities and contributions. Ireland is a very attractive market with all the ingredients for successful banking pro-growth economic policies, rich in human capital and a bridge to the EU, the U.K. and the U.S. We aim to drive competition through significant investment in innovation, supporting PTSB's customers and more broadly, the Irish economy, while delivering long-term sustainable growth. We plan to provide an updated midterm outlook with full year earnings assuming a successful closing of the PTSB transaction, which is subject to shareholder and regulatory approvals. Excluding any potential PTSB impact, we reconfirm all of our 2026 targets with net profit over EUR 960 million, return on tangible common equity over 20% and a cost-to-income ratio under 33%. With that, I'll hand it over to Enver.

Thank you, Anas. I will continue on Slide 4. Capital development. Our reported CET1 ratio landed at 17.4% and equal to EUR 105 billion of excess capital above our CET1 target of 12.5%. This factors in the sale of a minority investment that closed in the second quarter of this year. We generated 112 basis points of capital from earnings and we also completed 1 credit card SRT transaction. We have not made any dividend accruals in the first half. This puts us in a position to fully self-fund the planned acquisition, subject to shareholder, high court and regulatory approvals. On Slide 5, as of today, we anticipate that the transaction will cost us approximately 450 basis points of CET1 capital, which means that we need to be above 17% to meet our management target of 12.5% post transaction. Our starting point as of year-end was 14.6%, and we generated 285 basis points in the first half of 2026 through earnings, RWA measures and the temporary change in dividend policy and landed at 17.4% CET1 ratio. And with that, we are fully funded for the transaction. In terms of time line, the next relevant milestone is the PTSB shareholder scheme vote that will take place on July 30. And in terms of CET1 targets, these remain unchanged at 12.5% and or about 13% for excess capital distributions. Moving now to Slide 7, our P&L and balance sheet overview. We delivered a strong quarter with net profit of EUR 255 million and a return on tangible common equity of 28.7%. Core revenues increased by 2% quarter-on-quarter, with net interest income up 2% and net commission income up 3%. Operating expenses declined by 2% in the quarter, resulting in a cost-to-income ratio of 31%, in line with our through-the-cycle target of below 33%. Risk costs of EUR 75 million (sic) [ EUR 75.4 million ] EUR 10 million higher versus prior quarter, largely driven by macro and asset mix. The tax rate was unusually low this quarter at 23.1% including a positive one-off effect from the sale of the minority investment, while we expect it to return to prior levels for the remaining quarters. In terms of balance sheet, customer loans and customer deposits were flat quarter-over-quarter. Tangible common equity increased by 8%, not including any dividend accrual for 2026. We continue to maintain a fortress balance sheet with EUR 15 billion in cash, representing approximately 20% of total assets an LCR of 217% and the strong asset quality reflected in a low NPL ratio of 90 basis points. Moving to Slide 8. Net interest income increased by 2% in the quarter, with customer loans flat in Q2 '26 and supported by continued positive trends in unsecured consumer lending, including credit cards. Mortgage volumes remained subdued. Net interest margin at 348 basis points, reflecting an ongoing change in asset mix, while the deposit beta decreased to 31%. NII rate sensitivity is unchanged. Every 25 basis points increase delivers EUR 25 million per year after 12 months and EUR 50 million per year after 24 months. Net commission income increased to EUR 102 million, with continued strong results across business lines of Retail & SME particularly in credit cards and payments. For the rest of the year, we expect net interest income to grow gradually and a stable development in net commission income. On Slide 9, operating expenses amounted to EUR 185 million, representing a 2% quarterly decline with a cost-income ratio of 31%. We continue to deliver on synergy and efficiency measures across the larger group while the second quarter also includes the new collective bargaining agreement in Austria of plus 3%. We are well on track to achieve our full year outlook of an annual decrease of 5%. Results for the quarter came in at EUR 75 million, up EUR 10 million versus prior quarter. The increase reflects continued growth in higher-yielding unsecured lending, including credit cards, together with updated macroeconomic assumptions. Importantly, underlying credit performance remains strong with stable delinquency trends and an NPL ratio of just 9 basis points. Given the expected continuation of these dynamics, we now expect a full year risk cost ratio of around 50 basis points. Slide 10, Retail SME. The segment delivered net profit of EUR 215 million (sic) [ EUR 214.7 ], a return on tangible common equity of 36.5% and Pre-provision profits amounted to EUR 364 million (sic) [ EUR 363.6 million ], 7% higher than the previous quarter. Risk costs amounted to EUR 75.4 million corresponding to 77 basis points, driven by the asset mix change and macro update, while credit quality remains solid with an NPL ratio of 1.4%. We expect continued growth across the franchise. On Corporate, Real Estate & Public Sector, the segment delivered net profit of EUR 40 million (sic) [ EUR 40.1 million ] with a return on tangible common equity of 27.8%. Our focus remains unchanged on disciplined underwriting and risk-adjusted returns. Finally, Slide 11. We are entering the second half of the year from a position of strength. Profitability remains robust. Capital generation continues to be strong. Asset quality is resilient, and we remain on track to deliver our 2026 net profit target of more than EUR 960 million, while preparing for the next phase of growth through the planned acquisition of PTSB. And with that, operator, let's open the call for Q&A. Thank you.

[Operator Instructions] And your first question today comes from the line of Gulnara Saitkulova from Morgan Stanley.

So my first question is on risk-weighted assets. You reported almost EUR 1.4 billion reduction in risk-weighted assets this quarter. Could you walk us through the key drivers behind that reduction? Should we assume that the majority was attributable to the credit card SRTs executed in Q2? Or were there any other meaningful factors that contributed? And looking ahead, is it fair to assume that the risk-weighted assets have now bottomed out and will begin to grow from here. Have you largely completed your capital management initiatives SRTs? Or do you think there will be still further scope for RWA optimization. And finally, could you help us understand the P&L impact of their executed SRTs? And how should we think about the earnings implications of those deals going forward.

Enver?

Yes. So Gulnara, good question. On the risk-weighted asset decline, it is mostly driven by the SRT, you see it also reflected in the segmental numbers. So it's really in the Retail & SME segment. It's roughly EUR 1 billion decline that was coming from that transaction. In terms of outlook, I think consistent with what we said in the past, so we'll obviously look at more measures to do in the future, but at this point in time, we can't really share any more details on that.

And the P&L impact from the measures that you have concluded?

That is the EUR 1 billion that I mentioned of the credit card asset SRT in the second quarter.

P&L impact.

And from this EUR 1 billion reduction, do we -- should we expect any P&L impact from that going forward?

Yes, there is an ongoing P&L impact that we have in the NII line and in the risk cost line. And this specific one, it would be reflected in the NII line. And that's already fully reflected in our guidance.

Okay. And another question on capital. So without asking you to provide a formal target today, can you understand us the framework that you're using to determine the capital level for the Irish Bank? Because looking at the peers, they're operating at 14%, 14.5% CET1, should investors think of that as the right starting point for your subsidiary? Or do you believe the business can operate efficiently with a lower capital requirement over time? Any early thoughts on how you're thinking about it would be helpful.

It's really hard to -- the line is really, I think difficult to make up the question, but I think it was a question around the capital levels of PTSB. Unfortunately, we can't comment on anything specific to PTSB, so you're going to have to be patient on that one. But I appreciate the questions, Gulnara. Thank you.

Your next question today comes from the line of Gabor Kemeny from Autonomous Research.

One on deposits. I noticed that your deposit levels were flattish in Q2. Can you comment on the competitive situation on deposits in your markets, including in Austria, please? And my other question would be PTSB, are you aware of any processes which may have the potential to delay the deal completion?

Gabor, I'll take the PTSB. Unfortunately, we can't answer anything specific to PTSB or the transaction. I think our statements speak for themselves. And for the deposit...

Yes. So Gabor on to deposit levels, very similar to what we have seen in Q1 and also in the prior year. So actually, across the different markets and different franchises that we have. Our core deposits are flat or actually up a bit. There are 2 elements. If you look at the German online deposit market. That is something that we decided actually to let run off given the nature of it and also the higher cost so that's the one offset to it. And the other one, we see a bit of an increased competition in the nonretail part, especially in the money market deposit market as well as the competition that we see from the government in Austria with the bond issuance offer.

And did this have a meaningful impact on your pricing yet?

No, no real impact on the pricing. Again, it's just an offset of the growth that we have seen in the core franchise. So that's why you see an overall slight development, but no change to pricing.

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

I have a couple of questions. So first on core revenues. I was wondering if you could give more granularity on the targets, for example, it seems to me that on the current run rate, you could deliver an NII of around [ EUR 1,970 million ] or even above fees of around EUR 400 million. Is that something you agree with? And then related to that, did you slow down -- so you've done the SRT, but I was wondering, did you slow down your loan growth this quarter to support the capital creation for the PTSB deal and where if that happened. And then a final question on the cost of risk. If you could give more detail on the macro assumptions that you took for the top-up I'm wondering if oil price stays at this level by year-end, if you have to do another top-up by -- with the Q4 results. Thank you.

So thanks, Hugo. Good questions. Let me start with the RWA development. We have been very diligent in managing RWAs in the first half. Obviously, with the with the pending transaction. I think we've been pretty transparent about that. Has it impacted our business in terms of pursuing? No, we never -- the reality is markets are pretty frothy. We actually got redeemed out of a number of positions in the second quarter on some of the transactional lending, in particular, in real estate and some -- a few corporate positions. But no, it wasn't an active deflection of volume. We do have a good pipeline that hopefully materializes, but I feel like I'm a broken record, always saying we have a good pipeline and people continue to do, I think, a really aggressive at times, irrational things on the lending side. So -- but we'll be patient and disciplined, and we communicated where we are as far as our targets and being able to deliver that. So we feel good. And core revenue?

Yes, I'll take the part of macro assumptions. Currently yes, I would agree with you, Hugo. I think it's quite realistic. The numbers that you said with [ EUR 1,970 million ] for full year NII and EUR 400 million for the NCI. It's probably the current -- if you extrapolate the numbers and the trends that's where you probably get that for the full year. So yes, very realistic. Macro assumptions, just a regular prudent update that we do on macro, reflecting also the stagnation that we're seeing across the markets, especially on the lower GDP growth in Austria and the adjacent markets.

Your next question today comes from the line of Mate Nemes from UBS.

I have a few questions. The first one would be on the risk of guidance revision to 50 basis points. I just wanted to confirm, is this simply the reflection of the additional macro provisions you put in place in Q2? Or is there an element of perhaps some mix shift, towards credit card and broadly, consumer lending. The second question is on loan growth. Anas, I hear you about the promising pipeline on the corporate side. Can you talk a little bit about the volume trends and product trends in retail and also perhaps on a country-by-country basis? That would be helpful. And lastly, on deposits or deposit betas, you were down 4 percentage points sequentially, could you talk about your expectations going into H2? Should we assume a broadly stable development here.