Erste Group Bank AG (EBP) Earnings Call Transcript & Summary

Good afternoon or good morning, everyone, and welcome to Grupo Santander's analyst call to discuss the sale of 49% in Santander Bank Polska to Erste Group. I'm delighted to be joined by Ana Botin, our Executive Chair; by Hector Grisi, our CEO; and Jose Garcia Cantera, our CFO. We will be using a short presentation, which you can access on the Investor Relations section of our website, and Ana will take us through the presentation, and then we will open up for questions. Ana, over to you.

Thank you, Raul, and welcome, everybody. I'll take you through the slides, but I just want to briefly summarize 3 key points. The first one is that Santander started a new phase of value creation at our 2023 Investor Day, which, as you know, was enhanced earlier this year by our updated distribution policy. And now we believe that this latest transaction is another catalyst. It gives us and puts us in another -- in a higher and better position to show how we will be continuing to maximize returns from our capital and also from our footprint. And therefore, we remain very confident of a significant profitable growth ahead. My second point is that this deal makes the group more simple. We highlight that in our presentation in a minute, but it also gives us capital to fuel organic growth, which, as you know, the front book is much higher than the back book, additional share buybacks and bolt-on M&A, which we believe can reduce our cost of capital and improve our rating. What we run is a low-risk business. Diversification is always helping us. It has consistently and we have consistently delivered, as I have said many times on our targets. We've delivered on every one of our 3-year plans since 2015. And again, we believe that this deal is a catalyst that evidences the disciplined approach to capital allocation and capital rotation. And last but not least, we have guided in a conservative way for this deal to being earnings positive in '27, '28. We expect it to happen in '27. We are going to accelerate our buyback after the closing of this transaction, which we're expecting for the end of this year, and that will reduce any short-term earnings dilution in '26. It obviously depends on the value of our shares at the point when we do those buybacks, but I want to say that at these levels, we are keen to buy back as many shares as we can. So those are the 3 key points. I will take you briefly through the slides. You've seen the numbers, 49%, EUR 6.8 billion, all in cash, valuing the business at 2.2x spot tangible book value. Poland will remain a key market for Santander. We are going to keep the Polish consumer finance business. But very important, this deal comes with a strategic operation that will allow Erste Bank to leverage Santander's platforms in the Corporate Investment Bank and also our payments platform. So the network effects will be continuing, maybe not 100% of it, but a lot of them. Second, Erste Group will acquire a 50% stake in Santander Bank Polska Asset Management for about EUR 200 million. The capital gain will be around EUR 2 billion. That represents also a 100 basis point increase in our CET1 ratio. And the proceeds, as we mentioned -- I have mentioned earlier, will be deployed in line with our capital hierarchy framework, which is a fundamental part of our strategy. As I just said, conservatively, our EPS accretion should be in '27, '28. We expect in '27. It will be a combination of organic growth, which as I have said, comes at higher returns than overall group right now, share buybacks and bolt-on acquisitions. Very importantly, we're going to accelerate and bring forward the EUR 10 billion buyback we announced. So the intention is to distribute 50% of the capital release in Q1 of '26 as we expect the closing to happen at the end of this year. This means approximately EUR 3.2 billion, which is more or less what we anticipate will be the extraordinary buyback. Very important, of course, we'll still have the ordinary buyback from '25 earnings. So the number will be significantly higher. Again, we haven't guided to a profit number, but it would be above EUR 3 billion, significantly above EUR 3 billion. So there is upside to the EUR 10 billion we announced. I want to reiterate the EUR 10 billion is BAU in terms of -- does not depend on this transaction. And of course, that will be subject to regulatory approval and business performance. We continue to see buybacks as very attractive at these levels. And again, depending on the share price, when we close the transaction, we might decide to do more than what we are saying. Definitely at current valuations, it's very accretive. And as part of the transaction, we will have full ownership of the consumer finance business, acquiring the 60% that we don't own already from Santander Bank Polska. Again, we'll be closing the transaction around the end of this year. Just briefly what Santander Bank Polska has delivered to our shareholders, to all our shareholders, delivered a lot of value. It has very importantly been a reference in innovation and technology, customer satisfaction. It has created strong value for the group. Since we acquired the business, it was about 15 years ago, you can see that on the slide. We have grown profits by 5x. We have received EUR 3 billion in dividends. And with this transaction, we will get -- we will receive 3x our initial investment. We will retain a stake in the bank as a financial investment. We will, of course, review this periodically as part of our approach to capital allocation. Erste Group, the buyer is one of the oldest, most established banking brands with a clear commitment to deliver value and great service. So we are confident Erste Group is well positioned to support our customers in Poland, existing customers in Poland and to support the future growth of the bank. But very importantly, it will allow us to strengthen the connectivity of Santander Group with all of Eastern Europe customers, Eastern and Central Europe customers. So we have said many times that we review our businesses and markets from a strategic and also from a financial point of view. And I want to say that this deal ticks all the boxes in terms of strategic and financial rationale. We do, however, also review our businesses and markets under who is the best owner for that asset. And this is what we have considered as we have come to the decision of selling this bank or the 49% we have announced. I want to make a very important first point. This greatly simplifies the group's footprint. We will see some numbers on that in the last slide and focuses on the markets with stronger connectivity. Second, it crystallizes value. Again, the financial rationale today, we are selling at highs over the last 10 years at a significant premium to where we are trading right now. The third, it increases the optionality to deliver even better returns for our shareholders into opportunities, which are aligned with our capital hierarchy. Our organic reinvestment, as we have said at our Q1 and also in January, we are getting very high returns on our front book, and we're targeting returns on this capital above 20%. It delivers higher earnings per share, returns and growth prospects once the capital reinvestment is deployed. Very importantly, we will retain a strategic cooperation with Erste Group in corporate banking and payments. We are fully committed to the One Transformation, as we've said many times. We believe organically, this is something which will deliver continued growth and profitability, and that is -- continues to be our priority. You can see here the capital impact. The transaction will deliver about 100 basis points of capital, increase TNAV by about EUR 4 billion with a net capital gain, as I said, of EUR 2 billion. We do not change our capital guidance. I want to stress that. We still expect to be at 13% by the end of this year prior to the impact of this transaction. The pro forma CET1 ratio at the end of '26 should be -- sorry, by the end of this year, pro forma should be 14% and we will temporarily run with a higher CET1 ratio above our target operating range of 12% to 13%. Again, our guidance on capital does not change. The regulatory headwinds remain the same. We expect lower headwinds in '26. versus '25, and we will use the proceeds in line, again, with our capital hierarchy framework, prioritizing profitable organic growth, creating a compounding effect on earnings returns, book value and distributions, which is consistent with our recent track record. Subject to regulatory approvals, our intention is to distribute 50% of the proceeds or the capital release from this disposal to accelerate delivery of the EUR 10 billion share buyback, as I just mentioned, and that should happen in early '26. As a result of this, I want to stress again, we remain committed to the EUR 10 billion from BAU numbers. So there is the potential and definitely at these prices, we are keen to continue to buy back, but to increase those EUR 10 billion, which I want to remind everybody was on '25 and '26 earnings and should have happened in '26 and '27, it will now happen earlier. And we will front-load those EUR 10 billion, and there is space and potential to increase that. We reiterate our very strong commitment to continue to buy back at these prices. Finally, we will consider bolt-on acquisitions as we always have, complementary to our strategic aims and they generate attractive financial returns, which have to be higher than buybacks and also organic reinvestment, which is our preference, as we have said. One Transformation remains a cornerstone of our strategy. It depends on us and on execution. That is actually happening even ahead of our plans. We are advanced in deploying gravity and other tech platforms across the group. And very importantly, One Transformation and increasing network effects, which are much more -- much stronger across the Europe and Americas markets that we retain. In retail, you can see the benefits of our transformation in the numbers, and this transaction will allow us also to simplify. I really want to stress these 2 numbers you have here on the slide. If you take retail and retail commercial and Digital Consumer Bank, it's about 70% of Santander. With this disposal, we're actually talking about 90% in retail in 4 markets, in 4 currencies and digital in 2. So again, great simplification in terms of our footprint, our exposures in our FX and interest rate exposure. We also increased the hard currency exposure on a pro forma basis, by the way. And of course, Santander Bank Polska will be deconsolidated from retail P&L. So you will see that effect from the closing of the transaction expected by year-end. There will be no impact on our consolidated consumer business P&L as we are already incorporating those numbers. At the bottom line, we will remove the minority interest after acquiring the 60%. So you will see an effect on the minority interest at the bottom of the P&L of those profits that we don't own right now. The strategic cooperation with Erste will allow us to keep, I'd say, most of the network effects, but we need to work on that a bit more. Just to mention that, that's only 4% of the network effect, again, making the point about this being a less connected markets than all our other markets, core markets. And in payments, Erste Group will leverage our infrastructure for Poland and we'll expand it to the Eurozone and other geographies. And we will deconsolidate Santander Bank Polska Asset Management as we're going to -- and that will come from the wealth management vertical because we will be selling that to Erste Bank. So that is the presentation. I hope it's clear. Again, we remain very committed to our new phase of value creation, which happened 2 years ago. We took a big step this year with a major commitment to additional buybacks. And this disposal is yet another catalyst showing the disciplined approach, the strategic and financial rationale for our capital allocation decisions. So over to questions.

Thank you, Ana. Can we please move to questions. Operator, would you mind indicating how to ask questions?

[Operator Instructions]. We already have the first question from the line of Francisco Riquel.

So congratulations for the transaction, first of all. I have 2 questions, if I may. So the first one is why are you not increasing the target in terms of share buybacks from EUR 10 billion to EUR 13.2 billion? And then the second question is what regions and businesses are your strategic priorities in terms of in-market M&A. You mentioned you want to focus on strategically connected markets. So I wanted to ask what are the markets with the biggest connectivity within your footprint?

So in terms of the increasing the EUR 10 billion, we've said that the EUR 10 billion remains from BAU results in '25 and '26. We are advancing that buyback. So we will be advancing the extraordinary part of the buyback to the first quarter or as soon as we close the transaction. We are very keen to do more buybacks at these prices, but we will be consistent with our capital hierarchy and distribution policy. We will be offsetting the dilution -- actually, the dilution will be offset by that extraordinary buyback of EUR 3.2 billion roughly. Remember that you will get another -- we will do another buyback on the ordinary profits of '25, which again, let's assume it's EUR 14 billion, that's another EUR 3.5 billion roughly. So all in all, between the first quarter and the ordinary buyback, it's around -- would be not far from EUR 7 billion buyback. Again, we intend to reinvest organically. That will take a bit more time, but the EPS should be accretive. We said '27, '28, but should be by '27. So that would be the rationale. And again, the bolt-on M&A would have to be complementary to our footprint and be strategically and financially aligned with our goals and substantially or above buybacks and organic reinvestment. In terms of strategic -- I mean, I know Poland will remain a core market for us. DCB will continue to operate in Poland. As you know, U.S. is a core market, and we do not run a full retail commercial. It's a DCB strategy. So we will keep Poland as a DCB strategy. Erste Bank will be our partner for CIB and payments. So we're going to get all the benefits, but we cannot not also evaluate the strategic and network effects. This is the first time, let me reiterate this. This is the first time that in one of our 10 core markets, the strategic and financial rationale are aligned. Again, the least strategically relevant for us in terms of network was Poland. We're at historic highs on the pricing, and we're trying to maximize on both those items. So that would be -- I think I've addressed both questions.

Thank you, Ana. Could we have the next question, please?

Next question from Alvaro Serrano from Morgan Stanley.

I had a couple. One is kind of a follow-up from the one you just answered, Ana. In terms of the bolt-on acquisitions in the existing footprint, I understand. Obviously, U.S. is a very big market. So I don't know if you can give us a flavor if what you would be considering to look at in terms of size, what are the hurdle rates and what kind of businesses? Because in the past, some of the acquisitions have been not well understood. So in terms of what type of businesses you would look for on those bolt-ons? And second, just hopefully, very easy to answer. In terms of the FX mortgages, do you retain any risk on FX mortgages and the capital gains numbers, presumably that's a net number after you acquired the consumer business.

EUR 2 billion is the net number. We have provided some guarantees on the mortgages with a cap of EUR 200 million over 2 years. It's absolutely nonmaterial, not even for the Polish bank, but especially not at the group level. In terms of the U.S., we are 100% focused. Let me reiterate this. We're 100% focused on organic growth in the U.S. We have just launched Openbank very successfully, by the way. We are way ahead of our expectations. We are significantly improving our retail franchise in the Northeast. We are doing really well on our Corporate Investment Bank, as you know, including that acquisition that I think you're referring to a few years back. Without that acquisition, we would not be delivering the -- I think it's 17%, 18% on CIB for this year for '25 ROE, that includes the acquisition that I believe you're referring to. So again, sometimes it takes 1 or 2 years, but it doesn't take much more than that to deliver to our plans, at least in the last couple of years. So we are very satisfied with the organic growth. That's going to continue to be our focus. Having said that, bolt-on acquisitions and bolt-on is bolt-on. It's not transformational, will be considered as we have always done that. But our strategy, our results and our guidance is not dependent on acquisitions, actually not dependent on divestitures either. We believe that organic growth is what makes sense. I have here Hector, our CEO, who is fully focused as I am actually on the organic growth of One Transformation and on getting the most out of our current footprint.

Thank you very much. Could we have the next question, please, operator?

Next question from Britta Schmidt from Autonomous.

It's a bit of a numbers question. On the RWA reduction that is included on your capital side, can you help us break that down a little bit into the deconsolidation as well as RWAs for the stake and any other impacts that you see? And then on the 13% stake that you will be retained, can you just confirm that there are no conditions attached to that? There is no lockup period and you can freely decide what you intend to do with it?

Yes, we're not giving breakdown on RWAs, and there's no conditions to the 13%.

Yes. Britta, we can follow up, if you like, details. But at this stage, given there are various moving parts in the transaction, we are not going to detail. I don't know if Jose wants to give any more color.

No, this is -- that's why we say it's approximately -- it's plus/minus 4 or 5 basis points depending on whether the equity stake is above or below the limits. And we will know that when the transaction is closed. So the circa 100 basis points is the most likely scenario, but there could be a variability of a few basis points up or down, again, depending on the limits if the equity stake is above the limit when we close the transaction.

13%, as I said, no conditions. Do you want to add anything to that?

That's as it is. There's no conditions on that.

There's no conditions.

Thanks, Britta. Operator, could we have the next question, please?

Next question from Carlos Peixoto from Caixa Bank.

A couple of questions from my side as well. So typically, you will be having a higher [ CET1 ] and a higher tangible book value pro forma for this deal. I was wondering how does this impact your expectations regarding return on tangible equity for next year? Do you see here some erosion in return on tangible equity? Or do you expect this to be offset by the contribution from organic growth and bolt-on acquisitions? And on top of that, just earlier this year, the press had reported another potential disposals, mainly in the U.K. operation. Is this something that could still be in the making or definitely after having this deal, it is unlikely that [indiscernible] would consider a departure from the U.K.?

Okay. So in terms of next year, we haven't given guidance for '26 in terms of profitability. We will be having an Investor Day to present our new plan probably -- we haven't decided on the date, but more likely February -- March, February? Q1 next year. So we will give more line. But as I have said at annual results, the model still has upside in profitability. So our intention is that, again, we said 15% to 17% post AT1s. We're going to be at 16.5% this year, post AT1 -- sorry, we said pre- AT1, 3 years ago, upper end of the range was 17%. We're going to be at 17.5% compared to the numbers we gave in January of last year. So we still believe we can make this bank more profitable and also, by the way, grow faster. In terms of the U.K., as I've said many times, we've said the U.K. is not for sale. It is a core market. The U.K. network effects are very significant, much more than what we have in Poland. There's a lot of connectivity with both Europe and the Americas. The business is profitable. We believe we can make it more profitable organically, and that's One Transformation where the U.K. was not a priority, now it has become a priority. So there will be further integration in the group. And Hector is fully focused on that. We aim to, again, enhance the profitability of our U.K. business in '25 and '26, '27 even further. We don't -- as again, we've said we don't need to buy sell businesses to allocate capital efficiently. We can move capital around depending on the opportunities without selling or buying legal entities.

Thank you, Carlos. Operator, could we have the next question, please?

Next question from Hugo Cruz from KBW.

I have a few questions. So first one, a clarification. You talked about bolt-ons with a return target of 20%. Is that on an ROI basis, return on investment? Just to clarify that. Second, the bolt-ons, I think on the previous question, we're just talking about the U.S. So are we just looking at potential bolt-ons in the U.S. or are you looking at other markets as well? And third question, can you quantify the potential financial benefit of the agreement with Erste for CIB and payments, i.e., are there any kind of revenue targets or profitability targets out of those agreements?

Returns on bolt-on above our organic growth, which is currently 20%. So any organic bolt-on in any of our core markets should be above the 20%, which we can do organically because obviously, there's execution risk and of course, significantly above buybacks at today's prices with 16.5% RoTE post AT1s, the stock is still very attractive. In terms of financial benefits of the agreement, as I've said, the network effect is only 4% of the EUR 20 billion revenues. So it's not a big number, but we do think we actually could get more because the strategic alliance is not just for Poland. All the other Central Eastern European markets will be included. So we haven't done the numbers yet. We do believe that it's going to compensate potentially even the whole 4% of the network that we're losing in the case of Poland, which, as I've said, it's a very profitable bank, but not as interconnected as all of our other Europe and Americas banks. So it was by far the least interconnected. I think this is something which was apparent to everybody, but only now have we been able to align the strategic and the financial considerations that we think are critical in terms of capital allocation.

Thanks very much, Hugo. Operator, could we have the next question, please?

Next question from Luis Garrido from Bank of America.

Two questions, please. First, on the contractual indemnity you've signed with Erste on the Swiss franc mortgage risks. I think you mentioned in your remarks the EUR 200 million [indiscernible] over 2 years. But could you talk about -- is there a first loss piece that Erste would take first? And if so, can you give us that number? And the second question on the consumer part of this transaction. Can you elaborate a little bit on what it was about this business that was more interesting to you for Santander to keep versus the rest of the Polish business?

So the details on consumer, what I said, we actually will be provisioned 100%, but there's still some risk that this could go beyond. That's why we put a cap, and it's only a cap. It's EUR 200 million. It's not material. And it's -- I don't know if it's 2 or 3 years, so we can check on that. There is no first loss, no. But there is some arrangement on -- there is an incentive for Erste Bank to manage this in the best way possible. So we don't use the EUR 200 million, but I don't remember exactly the details of that. Maybe Raul, you can get back on that. In terms of consumer, consumer is interesting for us because that's a global business. It's -- we have scale. We've said that many times. We can compete in consumer because we are the preferred partner on OEMs. That's exactly why we can compete in the U.S. market where we're the fifth largest auto lender. So again, Poland has value. It's a big market. We are competing in other European markets where we don't have a retail commercial bank, and it's very accretive to our overall footprint to be in a large market like Poland.

Sorry, Luis, let me just comment and tell you exactly how the agreement works in terms of the Swiss francs. What happens is we have within the projections that we have in the Polish business already provisions for the next 3 years. So those EUR 200 million that Ana was talking about was in excess of the amount that we have on the budget, okay? So it's not a first loss, just to be precise.

Thank you, Luis. I hope that answers your question. If you'd like to follow up, Investor Relations is obviously around to help you further. Operator, can I check if you have any more questions?

Yes, we do have a question from the line of Alfred Alonso from Deutsche Bank.

Just a clarification on the Polish consumer business. Once you leave the retail banking, would you be thinking of getting a further deposit gathering activity there and getting more close to a digital bank in the country? Or you have some agreement with [indiscernible] not competing in that sense? And second, on that sense, what's the cost in Europe that you have from acquiring the 60% of the Polish consumer finance to from Santander Polska?

So deposit gathering -- there is a noncompete on commercial banking, yes. But Consumer Banking is separate from that. So that's the first point. In terms of the cost of acquiring, it's included in the capital calculation. And it's a listed -- we're negotiating that right now. It's a listed company, and there's a number, I don't think -- what's the number for that?

So this is how you get to the EUR 6.4 billion. The consideration is EUR 7 billion, and the net number that we have indicated or used in our calculation is EUR 6.4 billion. So the gap reflects the consideration for the consumer.

And netting the asset management, right? Because we're selling 100% of the asset manager, but we're keeping 100%, which is today under Santander Bank Polska -- so Santander Consumer Poland is under the bank. So that comes out, and we keep 100% of that. And on the other side, we sell asset management. The net of that is the EUR 400 million, which gets you from the EUR 7 billion to the EUR 6.4 billion.

Thanks very much. I think we have no further questions left. So can I just thank everybody for joining this call at short notice. Obviously, for some people in the U.K., it's a bank holiday. We will be around tomorrow as well if you've got any follow-up questions, very happy to take them offline. Thank you so much, and have a good rest of the day.