Good day, and thank you for standing by. Welcome to the BAWAG Group Preliminary Full Year 2023 Results Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one and one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one and one again. Please be advised that today's conference is being recorded. Also, a transcript will be published on the company website. I would now like to hand the conference over to your speaker today, Anas Abuzaakouk, the CEO of the company. Please go ahead.
Thank you, operator. Good morning, everyone. I hope everyone is keeping well. I'm joined this morning by Enver, our CFO, as well as joined by David O'Leary, our Chief Risk Officer. We have a lot to cover today, so let's jump right into it with a summary of full year 2023 results on slide three. So for the full year 2023, we delivered a record net profit of EUR 683 million, earnings per share of EUR 8.31, and a return on tangible common equity of 25%. The underlying operating performance of our business was very strong, with pre-provision profits of EUR 1,040 million, up 22% versus prior year, and a cost income ratio of 31.8%. Total risk costs were EUR 93 million, with a low NPL ratio of 1%.
The fourth quarter was strong, with a net profit of EUR 177 million, earnings per share of EUR 2.15, and a return on tangible common equity of 25.7%. We delivered on all of our 2023 targets. We also distributed EUR 480 million of capital in the form of EUR 305 million dividends and completed a EUR 175 million share buyback during the course of 2023, which reduced our shares outstanding by 5% and which now stand at 78.6 million shares. In terms of customer loan growth and capital, average customer loans were flat quarter-over-quarter and down 7% versus prior year. Average customer funding was up 2% quarter-over-quarter and up 6% versus prior year.
We generated 330 basis points of gross capital for the year. We ended the year with a CET1 ratio of 14.7%, net of the dividend accrual and excess capital of EUR 475 million, equal to approximately 250 basis points. We will be proposing a dividend of EUR 5 per share or EUR 393 million to the AGM in April. In terms of business activity, 2023 was defined by staying patient and disciplined, given the significant movement in rates, high inflation and subdued consumer confidence. We saw an impact on customer lending volumes as high rates and inflation translated into anemic growth, negatively impacting lending opportunities across both the retail and SME business, as well as the corporates, real estate and public sector business.
However, this dynamic is one that we believe will be temporary in nature. Once markets settle into a new normal of interest rates and inflation subsides, we anticipate a pickup in originations and overall lending levels. Despite our record performance in 2023, our best years are still ahead. Our strategy has been consistent since 2012, one focused on being patient, disciplined, cutting through the noise, and consistent execution. This patient and disciplined approach to commercial lending, focused on risk-adjusted returns, not blindly chasing volume growth and thinking beyond the immediate quarter, is not always obvious or understood. However, we are rewarded when unique opportunities present themselves, and we have the capital and liquidity to take advantage of such opportunities. Disciplined capital allocation and M&A in specific is key to our strategy and how we run the bank.
We aim to be good stewards of capital, making sure we are prudent in our capital distribution plans, maintain our fortress balance sheet, and being ready to capitalize on unique opportunities. Underpinning this is our strong profitability, which allows us to accrete significant amounts of capital each year. We then use this capital to invest in our franchise and teams, extend credit to our customers, acquire businesses and distribute to our shareholders. We closed the year with a significant amount of dry powder that we are now investing in a transformative and highly accretive acquisition of Knab Bank in the Netherlands. This deal will expand our DACH-NL footprint, building out our customer franchise and allowing us to significantly grow the business and earnings in the years ahead. We have been disciplined in our 12 acquisitions over the past decade, and this acquisition is no different.
We were fortunate over the past few months in having the team and infrastructure in place to allow us to complete a thorough due diligence. Our experience with M&A transactions, the continuity of our senior leadership team, and the remarkable commitment of our teams and advisors allowed us to pursue this opportunity. Although we cannot dictate the timing of deals, we can ensure we are ready once they present themselves. On slide four, an overview of the M&A transaction. Knab is a digital bank that was founded in 2012 and has developed a very strong brand and loyal customer base. The bank consists of approximately 400,000 retail and SME customers who have current accounts, with the majority using Knab current account as their primary banking relationship. Knab has a diverse customer base and is a leading player in the underserved self-employed space.
This is a strategic acquisition that expands our footprint into the Dutch retail and SME banking space, and will position us for future growth in one of our core markets. This is a strategic fit in terms of product offering, providing a platform for current accounts, which will augment with our retail and SME product offering across the group, as well as existing Dutch mortgage origination channel. We believe the combination of the Knab team's experience and expertise, coupled with the operating infrastructure of the group, will be a dynamic combination. We will work with the leadership team to continue growing the business. We've had a presence in the Netherlands since 2019 and have always found it an attractive market. Today, we have approximately EUR 4 billion of residential mortgages, of which approximately 90% are government-guaranteed NHG mortgages.
Knab has EUR 12 billion of seasoned Dutch mortgages, of which 56% of the mortgage portfolio are government-guaranteed NHG mortgages. On the funding side, the bank has approximately EUR 14 billion of funding, of which EUR 11.5 billion are comprised of customer deposits and EUR 2.5 billion of covered bonds. The customer deposits are a mix of current accounts, daily savings, and term deposits. The Knab Bank acquisition will be fully funded from our excess capital of EUR 475 million, and consume between 100 and 150 basis points of CET1 capital, depending on the scope and execution of capital relief measures and strategic actions taken throughout the year.
Given the nature of the transaction and the quality of the franchise we are buying, the deal will be P&L accretive day one and is projected to contribute EUR 150 million of pre-tax profit by 2026, with EPS accretion of approximately 16%, without factoring in any future potential buybacks. This compares to a 2-3x EPS benefit versus pursuing a share buyback based on the capital consumed. The deal was underwritten with a premium to our ROTCE target of greater than 20%. As part of downside loss protection and potential capital relief measures, we have and will continue to utilize synthetic risk transfers, or SRTs, on various asset portfolios. The transaction is subject to customary regulatory approvals, and we hope to provide updates through the course of the year.
We are extremely excited about this acquisition and welcoming the Knab team into the BAWAG Group. Okay, moving to slide five. Recap on the full year results. We delivered net profit of EUR 683 million and an EPS of EUR 8.31, up 34% and 43% versus prior year, with a return on tangible common equity of 25%. Overall, strong operating performance across the board, with operating income up 15% and operating expenses up 2% versus prior year. Risk costs were EUR 93 million, down 24% versus prior year. Tangible book value per share was EUR 35.35, up 8% versus prior year and up 6% versus prior quarter. This takes into account the full year 2023 dividend accrual. On slide six, our capital development.
At year-end 2023, our CET1 ratio was 14.7%. We generated 330 basis points of gross capital as we continue to generate significant amounts of capital, resulting from our very strong organic earnings generation, with EUR 475 million of excess capital after having deducted a dividend accrual of EUR 393 million. The EUR 475 million of excess capital will be used to acquire Knab Bank, as well as pursuing other strategic opportunities that are at an advanced stage. Given our significant capital accretion of over 300 basis points per year, we will revisit buybacks as part of our overall capital distributions in 2025.
Moving to Slide seven, our retail and SME business delivered full year net profit of EUR 526 million, up 19% versus the prior year, and generating a very strong return on tangible common equity of 38% and a cost income ratio of 30%. Full year pre-provision profits were EUR 798 million, up 16% compared to the prior year, with operating income up 11% and operating expenses up 1% versus prior year. Risk costs were EUR 86 million, up 6% versus prior year. We continue to see solid credit performance across the business with an NPL ratio of 1.7%.
On slide eight, our corporates, real estate, and public sector business delivered full year net profit of EUR 169 million, up 16% versus prior year, and generating a strong return on tangible common equity of 23% and a cost income ratio of 25%. Pre-provision profits were EUR 240 million, down 1% versus prior year. Risk costs were EUR 5 million, down 86% compared to prior year. We continue to see solid credit performance across the business with an NPL ratio of 80 basis points. With that, I'll hand over to David to provide a year-end update on asset quality and our overall risk profile.
Thanks, Dennis. Page ten is a top-down view of total assets, which points to our highly liquid balance sheet built through long-term organizational focus on risk-adjusted returns and downside mitigation. Of EUR 55 billion in total assets, EUR 13 billion or 23% is in cash. We conservatively position ourselves with excess liquidity supported by stress testing and to ensure ample capacity for opportunities as they may arise. We have EUR 5 billion in investment-grade securities in our treasury book, which leaves EUR 36 billion or 64% of total assets in customer loans. The combination of our long-term conservative risk appetite with disciplined underwriting has built a resilient balance sheet. We dynamically manage credit risk. We take no interest rate or FX risk and maintain no market risk RWAs or trading book.
Our total customer book is 72% DACH-NL , 28% US and Western Europe, with no exposure to Eastern Europe or Russia. 80% of our lending is secured or public sector, reflecting the long-term strategic growth in low-risk asset classes and collateralized lending. In terms of the segments, retail lending comprises 60% or EUR 22 billion of customer loans. 80% of this is secured, primarily EUR 15 billion of mortgage loans across Austria and Western Europe. The corporate, real estate, and public sector businesses make up the remaining 39% or EUR 14 billion of customer loans. Within this, corporate lending is EUR 3.5 billion. We have strategically reduced exposure in this business for several years, as we felt market terms and pricing were not commensurate with the underlying risks. The net leverage level of the portfolio is below 4 times today.
Our focus on non-cyclical industries and high cash flow borrowers has proven highly resistant to inflationary and rate impacts. Commercial real estate exposure also has weathered the rate increases to date, yet sectoral challenges remain. Disciplined underwriting and protective structures have mitigated our downsides as the market adjusts to the dramatic rate increases of 2023. Nonetheless, the office asset class remains challenged, primarily in the U.S., yet our exposure here is limited, and we feel the worst is behind us. At the end of 2023, our risk metrics demonstrate our asset quality and conservative positioning. Our NPL ratio is just under 1%. This is a constant level since 2021, demonstrating the consistency of our asset quality. Stage two assets remain low at 6% of customer loans.
We maintain an ECL management overlay of EUR 80 million in excess of our modeled reserves as a buffer against potential lag effects from the dramatic rate shifts on our customers, as well as idiosyncratic risks that may arise. Moving to page 11, and I will touch on our retail and SME exposure. The majority of the portfolio is comprised of housing loans of EUR 15 billion. 24% are state guaranteed, and the remainder bears a comfortable average LTV of 60%. While originations have been subdued with the impact of higher rates, we have been consistently cautious regarding risk of value declines on underlying housing stock. Since early 2020, the LTV of our new originations has averaged below 70% to ensure substantial equity buffer for the borrower.
In addition, 90% of our originations here are fixed rate, with a focus on borrower credit quality through debt service to income limits. The consumer and SME segment is split approximately half consumer lending, and the remainder, leasing, specialty finance, and SME, which is primarily collateralized. EUR 3.5 billion of consumer loans focus on prime and near-prime customers. However, this asset class is sensitive to macro developments. After benefiting from an overly benign loss environment supported by high savings and government support over the past few years, we have seen a return to normalized pre-pandemic delinquency and loss rates. This effect is plateauing as in recent vintages for 2024, as customers, consumers adapt to inflation impacts and rate increases. However, it remains dependent upon unemployment rates in our markets. Given the sensitivity, our underwriting here is critical.
We ensure significant cushion and debt service capacity, which we tightened across all of our channels in 2020, and remains in place today. We price for through-the-cycle risk levels and focus on customers with high income stability. This limits our market share by such focus, but it benefits in stability of the asset class. For the last years, the NPL ratio remains consistent at 1.7%. On slide 12, an update on our real estate portfolio. The fundamentals that drive cash flow at the asset level remain resilient for residential and industrial logistics categories. The office sector in the U.S. remains challenged, as demand shifts have reduced future rental incomes and therefore values. Our total commercial real estate exposure is down 4% quarter-over-quarter and down 16% since 2022.
Residential and industrial logistics assets compose 65% of total exposure and 74% of U.S. exposure. These sectors are supported by continuing high demand and lack of supply. Underlying cash flows at the asset level are increasing, and the rate impacts are generally being digested. Our U.S. office exposure stands at $459 million, flat with prior quarter. There has been a bifurcation in this asset type. Commoditized, low-amenity offices are most negatively impacted, as demand shifts have reduced the outlook for cash flows on these assets. Higher quality A-class offices have been less affected and with more stable occupancy and leasing activity returning. The risk of distress remains as maturities come due in the coming years, likely in the form of refinancing and recapitalizations over an extended time frame.
Our performing office book in the U.S. has a senior debt yield of around 9.5%, demonstrating stable and sufficient cash flows with a 6.5-year average lease term. The LTV, updated at Q4, remains less than 70%, with strong institutional sponsors supporting their equity values. We monitor our risk through regular stress tests to assess the downside of continued distress in this asset class. Our management overlay of EUR 80 million covers the severe adverse case losses across this portfolio, which was also evidenced in our ECB stress test results in 2023, where a stress greater than 50% value decline resulted in under 2% losses across the portfolio. On slide 13, some additional information on the commercial real estate portfolio. The resilience of the portfolio has been based on selectivity of assets, value cushion, and importantly, our structural protections.
100% of loans are senior secured. We have no subordinated financing. The average deal size is EUR 38 million. As through the cycle lenders, it is critical that we are first in the capital stack and have significant equity beneath us. We ensure protective terms in our documents, such as performance triggers, cash, cash sweeps and traps, and interest reserves. We avoid single asset risk and structure the majority of our deals as portfolio financing. 81% of our total CRE exposure finances multi-asset portfolios that are cross-collateralized, providing significant credit enhancement. Given the the granularity of the collateral, the assets are more liquid and allow for easier dispositions for borrowers to bring leverage down across the portfolio. Our guidelines have remained consistent over the long term, targeting less than 60% LTVs for new business to ensure against valuation decline.
On a total portfolio basis, the average LTV has remained in the mid-50s. As values have declined with the rise in rates, it has been countered by the seasoning of the book, concentration in fundamentally strong asset classes, and new business at consistently low LTVs and high debt yields working with strong sponsors. 94% of our book is LTVs below 80%. Office, particularly in the U.S., has seen values adjust most significantly, with an increase in LTVs based on 4 key valuation updates reflecting current markets and underlying cash flows. The 67% LTV in the U.S. still provides value support for our loans. Exposure to U.S. office remains low at 1% of customer loans, total customer loans, and 9% of total commercial real estate.
With that, I would just conclude that while the market for commercial real estate remains challenged, we are confident our portfolio will be supported by asset quality and risk mitigation.
Thank you, David. I will continue on slide 15. Again, a strong quarter with net profit of EUR 177 million and a return on tangible common equity of 25.7%. Full year came in at 25%. Both net interest income and net commission income up 1% in the fourth quarter. Year-over-year, core revenues were up 14% on a quarterly basis and 16% on an annual basis. Operating expenses up 1% in the quarter and cost income ratio relatively stable at 32%. Risk costs of EUR 30 million in the quarter, reflecting year-end bookings and partly high underlying risk costs, mainly coming from the consumer business. ECL management overlay remained at EUR 80 million. On slide 16, key developments of our balance sheet. Few things I would highlight here.
Customer deposits were up 4% in Q4, driven by first time consolidation of Idaho First Bank, as well as higher year-end balances from public sector clients. A similar situation, we have observed a year ago. Customer loans remained almost flat while our cash position went up 16% to over EUR 13 billion or 23% of the balance sheet, leaving us with a very comfortable liquidity buffer to address potential organic and inorganic market opportunities in the coming quarters. In terms of capital, we again generated approximately 90 basis points of gross capital from earnings, and after accounting for the earmarked year-end dividend of EUR 5 per share, CET1 ratio came in at 14.7%, leaving us with an excess capital position of EUR 475 million.
Next slide, our customer funding, which is made up of customer deposits and triple-A rated mortgage and public sector covered loans, grew by 6% year-over-year to around EUR 45 billion. Cash position now at EUR 13 billion. In terms of customer deposits, we have seen no structural changes in the fourth quarter. Repricing continues in line with our expectations. Overall deposit betas are now at around 25% in the quarter, expected to grow to 30%-35% and peak in the coming quarters. With that, moving on to slide 18, core revenues. Positive net interest income trend continued in Q4, up 1% versus Q3, despite a static customer loan development. The net interest margin is now at 300 basis points for the quarter, also reaching peak territory.
In terms of net commission income, up 1%, with an overall good and stable performance in the quarter. For 2024, we expect core revenues and net interest income to grow by 1% based on current interest rate forwards. We also expect a flat to positive loan growth development. Slide 19. Operating expenses fully in line with expectations and within our guidance of 2% year-over-year. For the quarter, operating expenses were up 1%, and our cost income ratio remained largely stable, now at 32%. Going into 2024, we expect wage inflation in the area of around 8%. That will be partly offset, but by our ongoing optimization programs, mostly through further simplification and standardization across the group, leaving us with an expected cost increase of around 3% for 2024.
Let me also address regulatory charges here that technically are not part of our OpEx, but part of our overall expenses. In Q4, we actually had a release because of higher recoveries from prior deposit guarantee scheme cases. With that, the overall deposit guarantee fund is almost fully funded now, which means that our foreseeable regulatory charges will be significantly lower going forward. Our expectation for 2024 is around EUR 16 million, and that will be evenly spread across the quarters. Moving to slide 20, risk costs. Overall, continued strong asset quality with a low NPL ratio of 1%. We booked EUR 30 million of risk costs in the fourth quarter, which was higher than the prior quarters, partly because of year-end bookings and partly because of higher underlying risk costs in the consumer segment.
We kept our management goal at EUR 80 million, and given the overall challenging macro environment, we would expect higher risk costs in 2024 in the context of 25-30 basis points. On slide 21, our outlook for 2024 and targets. 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 2024 of 1%, while containing operating expenses to 3% growth, despite significant inflationary headwinds. Foreseeable regulatory charges are expected to go from EUR 40 million in 2023 to around EUR 16 million in 2024. 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.
On the back of a record year in 2023, we are setting the financial targets for 2024, which is a profit before tax greater than EUR 920 million, return on tangible common equity greater than 20%, and the cost income ratio under 34%, which is consistent with our prior communicated midterm targets. With that, operator, let's open up the call for questions. Thank you.
Thank you. As a reminder, to ask a question, you will need to press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. Please stand by while we compile the QA roster. We will take our first question. Your first question comes from the line of Mehmet Sevim from JP Morgan. Please go ahead. Your line is open.
Good morning. Thank you for taking my question. Anas, you mentioned in your opening remarks that the excess capital that you have right now will be used for Knab, but also for other strategic acquisitions that are currently at an advanced stage. Would you be able to give us a flavor of what these could be? And I'm asking specifically because looking at the trajectory of capital, it seems like while this excess is reserved for Knab, you will still be operating with a good level of excess until the transaction closes, and at the same time, you're obviously building a lot of new organic capital as well.
So is it reasonable to assume that you could also consider other larger opportunities, which were in the headlines in previous weeks and months? Or should we assume that this is the biggest one, and the most relevant one that you would do at this stage?
Hi, Mehmet, thanks for your very good question. I would say the year-end excess capital in basis points was 250 basis points, approximately. The Knab deal is a range of 100-150 basis points, which I mentioned based on some of the strategic actions, capital relief measures, and the like, through the course of the year. That obviously leaves you with some excess capital. We said we will not be doing share buybacks in 2024, and I also mentioned that we are in advanced stages on strategic opportunities. I wish I could provide more detail, but I would say probably just a little color, the strategic opportunities are in our core continental Europe market, the DACH-NL , and have a retail and SME focus. But I really can't go into any more detail other than that. I hope you appreciate that.
Fair enough. Thanks very much. That, that's helpful. And can I also ask on the organic loan growth trajectory for this year?
Yeah.
How's your appetite now for new loan origination? How's demand looking? You know, based on your opening comments, again, is it fair to assume that the overall trends will remain muted for now going forward?
Yeah, so remember that, you know, I said in 2023, all the different factors in terms of high inflation, you know, subdued consumer confidence, the velocity of rate increases, all of that weighed in, in terms of overall lending volumes. At least from what we see now and just I think, if you look at the forwards and just a couple of other variables in inflation subsiding, we think, there'll be a pickup in originations, in overall lending levels. I think it's probably, you know, conservatively, conservatively fair to say flat to modestly growing from what we see today. But it won't be what you saw in 2023.
I think that was a really unique and quite frankly, we were being patient and disciplined, as we always are, because we wanna make sure that we're focused on the right, risk-adjusted returns, and that, you know, the lending works for both the customer as well as the bank. It has to be a, a reciprocal relationship so but I'd say flat to modestly growing.
Great. Very helpful. Thanks very much.
Thanks, Mehmet.
Thank you. We will take our next question. Your next question comes from the line of Hugo Cruz from KBW. Please go ahead, your line is open.
Hello, hi. Thank you very much. I have three questions, if I may. First of all, on Knab, the EUR 150 million PBT target. If you could provide a little bit more color, what, what are the drivers of that? Or, you know, if, you know, what revenues or costs you expect by, by 2026. Second, on the CRE, can you tell us how, how do you—how often do you update LTVs, and how do you do that? So, you know, what sources you use or if you haircut public sources.
A nd third, you mentioned RWA optimization, you know, around the Knab deal. Is that all within the Knab perimeter? And is that how you get, you know, you go from the price paid to the capital impact? And is there any room to also do Knab, sorry, RWA optimization outside of the Knab perimeter, so also in the group to bring down the capital consumption? Thank you.
Thank you, Hugo. All very good questions. I'll take the first one. I will then ask David to cover the commercial real estate and valuations, and Enver will talk about some of the capital relief optimization measures. So, you know, Hugo, at this point, obviously, we just signed this morning. We're gonna provide more detail through the course of the year from signing to closing, and then obviously, it's all subject to regulatory approvals and the timeline. But I can tell you it's P&L accretive day one, and I think you should take from the fact that it's the profit contribution, the pre-tax profit contribution of EUR 150 million in 2026, should give you an indication of the viability of the franchise, the profitability.
We'll get into the different P&L line items in due course, but this is unique in the sense that it is a franchise that has a lot of opportunities from day one, and we're excited about those opportunities. So I will give it to... Why don't you, Enver, why don't you take the-
Yeah
capital, and then we'll go to Commercial Real Estate?
Sure. Sure. So Hugo, we gave a range on the capital impact, and one aspect of that is potential strategic risk transfer options that we are looking into that could concern the Knab transaction. But you're absolutely right, it's also outside of it. We have done it in the past also on our existing balance sheet, and that's something that we'll consider if it makes sense or not.
On the valuations question, so, by regulatory regulations require we do it update our values annually. About half of our book is marked externally within 2023. Given what we had seen with lack of transactions and simply just not, you know, comfortability with the cap rate assumptions that external valuers have been using, we took some incremental, you know, markdowns on top of the externals in many cases. So, also, given sort of the stress in the office market, we did an updated Q4 for all current office deals as well.
Thank you very much.
Thanks, Hugo.
Thank you. We will take our next question. Please stand by. Your next question comes from the line of Gabor Kemeny from Autonomous Research. Please go ahead, your line is open.
Hi, team, exciting times. Just on the EUR 150 million accretion, I understand you will get into the details a little later. But just conceptually, can you talk a bit about how you see where you see potential for funding synergies, for cost synergies, for revenue synergies? I mean, it's a market where you are present, so I presume you should have a number of possible opportunities. Second one is, I think you talked about two, three times accretion relative to the buybacks from the deal announced. Can you remind us what is exactly the basis to where you are what you are comparing your accretion with?
And then thirdly, slightly linking back to the previous questions, just broadly speaking, what is your view on the German card market from a business perspective? Thank you.
Let me start with the last question, and then I will hand it over to Enver to address the questions I think you had specifically on Knab. The German card market, like the Austrian card market, is one that we like, and we think the dynamics are unique. It's more of a niche space. We're very familiar with cards, obviously, in general, but as I mentioned, Gabor, we are focusing on kind of DACH NL opportunities in the retail and SME corridor. And that's, you know, that falls into that category. But maybe I'll give it to you on the Knab.
Yeah, sure.
Why do you-- Sorry, and to interrupt.
Yeah.
Why do you actually like it, just, broadly speaking?
You know, just like in speaking of cards in general and personal loans to a certain degree, but more cards, it's a niche market. I think in... I can't speak to the specifics, but in Germany, it's about a EUR 7 billion market. If you think about what we've done in specialty finance and other areas, we like kind of niche segments, be it factoring, be it leasing, auto leasing, equipment leasing, and it shares a lot of the same characteristics and dynamics, so. And from a risk profile, it's something that I think we are very diligent on underwriting and the conservatism. So that's, I think that kind of, from a risk-adjusted return standpoint, we see real opportunities there. But broadly speaking, right, across, across the DACH region as it pertains to cards. Can I?
Yes, sure.
No problem.
So Gabor, I can't really share a lot of details, and we, as I said, we'll provide more details in due course. But conceptually, on the P&L drivers on Knab, it's gonna be the same business, so we would try to enhance with additional products and also to see if we can do something between the two product factories and customer bases. But that's not in the numbers. That's potential upside that we have. It's all based on the current business model, and it's all based on the expectation also in the of the interest rate curves in the future. So that's all in the numbers. From a group perspective, we'll try obviously to provide support from a banking perspective in terms of central functions, and that's the main underwriting thesis on that.
Any more detail, we will share in the future.
I'll just add, and for the EUR 150 million, that is excluding any of the augmentation of retail and SME products.
Correct.
We have a full suite of retail products, and that was not factored into the figures. And that's why I think the, the growth opportunities are amazing, given what we already have, on display in terms of the suite of products, as well as the opportunities in the Netherlands, and really, the diverse and loyal customer base that the Knab team has built. So, but that's not part of the underwriting. When I mentioned the returns, I mentioned pre-tax. That is all potential upside, but obviously something that we're gonna be focusing on. So thanks, Gabor.
I think there was a question on EPS, EPS accretion. I think you asked for the product. Yeah. So we gave a range of the capital impact, which is the 100-150 basis points, and we tried to make a like-for-like comparison. In a way, if we spend that 100-150 basis points in share buybacks at a certain price that we assumed, which is close to the market price today, then it just gives you that simple math of 2-3 times, right? And the range comes because there is a range on the capital impact. So it's really like-for-like comparison between the two options.
Very clear. Thank you all.
Thanks, Gabor.
Good questions.
Thank you. We will take our next question. The next question comes from the line of Jovan Sikimic from RBI. Please go ahead. Your line is open.
Hello, good morning. I would just have maybe to ask you to clarify whether Dexia leasing portfolio is included in the new guidance for 2024, and if you can remind us what is the capital impact from this takeover?
Yep. Yes, Jovan, it is included in the outlook, so it's no further M&A is included in the guidance for 2024. I think it's closing actually today. It's EUR 750 million of public sector assets. The capital impact is really de minimis because these are really-
Okay.
Liquid assets.
Okay. And maybe in the context of the Knab takeover, if you may compare, let's say, mortgage development in BAWAG in Austria and the development of mortgages in Knab, in the last couple of quarters or throughout 2023, if possible.
I can tell you, Jovan, the mortgage development, at least from what we've seen in the Dutch market since 2019, because that's when we really started originating, has been, a positive, development. We have EUR 4 billion of Dutch mortgages. Approximately 90% of that is government guaranteed, what they call the NHG mortgages. The Knab portfolio is quite seasoned. LTV is under 60% on the portfolio, which is something obviously we like.
And equally, I think important is 55% or almost 60% is NHG mortgages in that portfolio. And the way we underwrote this is at a certain spread level, consistent with our conservatism on spreads, on mortgages that we're originating today. So we think it's a really good, complement to what we have. And yeah, I think you were saying that the Austrian mortgages, like that was part of the subdued lending volume in 2023, because quite frankly, consumers were cautious given the-
Yeah
R ising rate volatility, or raising rate environment and the volatility in rates. I think that we'll see more of a normalization in the years ahead, so.
You would expect a bit of normalization in Austrian mortgage market, right?
Yeah. Yeah.
But slow. Okay.
Yeah, it's going to be slower. Look at the volumes last year, right? They're down almost 50% across the market.
Yes.
And then you couple them the fact, Jovan, that we are very disciplined on risk-adjusted returns and, that, you know, we would have thought there would be more discipline in pricing, but, we'll see what how things develop.
Okay. And last one, maybe on also Knab, based on, I think, some press comments about purchase price and the equity base of Knab. At least, I think the numbers are available for the first half of 2023. So we can speak about, I don't know, 0.6 price to book value, is it?
Yeah, I think point-
Assumption.
0.55%-0.6%. It's a bit of a moving target, but yeah, I think that's okay.
Okay.
Thanks, Jovan.
Thanks, I appreciate it. Bye-bye. Thanks.
Thank you. We will take our next question. Your next question comes from the line of Tobias Lukesch from Kepler Cheuvreux. Please go ahead. Your line is open.
Yes, good morning to everyone. Thanks for taking my question as well. Maybe touching on two points. One, again, this EUR 150 million pre-tax next year, and secondly, potentially on the loan growth or the dynamic niche markets you see for 2024. Again, firstly, on the 150, I understand that a lot of details will come. Would just be very interesting, you know, like how you would see the step up potentially from a 2025 to 2026, assuming that the business is fully consolidated basically from the first of January 2025? And secondly, on the loan growth, I mean, you mentioned that you like, you know, potential niche, that you do see a revival, basically, of the mortgage loan lending.
You know, my question is here, are there particular pockets where you are retreating from or have retreated from recently? And where do you see the opportunity lying, basically, to write business, especially in H1, so product and maybe geography-wise, and then potentially in H2? Thank you.
I'd say, hi, Tobias Luke, I would say there's a step function. If you just took your assumption of, you know, starting of 2025, there's a step function between 2025 to 2026. There's an element of integrating the business, but we'll provide more clarity on that. But really, the business as it is, is a very strong franchise, and I think we're going to be able to augment with some of the operational support from our end, in particular, tech ops and the like.
Tobias, I was not sure if I got it right. Just to clarify, the EUR 150 million we said in 2026. I think you said 2025.
Exactly. In 2026. I was just wondering, you know, like, if I-
It's twenty-five.
In 2025 or a kind of EUR 100 million in 2025 already, right? And what the step-up is, the magnitude of the step-up.
Yeah, no, we'll provide more detail. I, I understood your question. I think Enver was just clarifying the 26 piece. I said it's P&L accretive day one, but we'll provide more guidance on that. But you should - P&L accretive day one, there's a step-up function, and EUR 150 is what we are projecting the contribution is in 2026. Now, what was the second question?
Loan growth opportunities.
The loan growth opportunities. You want to take it or?
Yeah, I mean, it's, it's more of the same, Tobias. We would actually like to do retail SME consumer mortgages. We have seen challenges in certain markets, one of the reasons why we also decided to sell our Basware for customers in Germany. But overall, we would like to stay in the same kind of zip code around retail SME, and we think there is gonna be a bit of a recovery in 2024.
Thank you.
Thanks, Tobias.
Thank you. We will take our next question. Your next question comes from the line of Simon Nellis from Citibank. Please go ahead. Your line is open.
Oh, hi. Thanks. I think most of my questions about the interesting stuff's been done, so I'll focus on again. Just, I just noticed that your U.S. commercial real estate exposure increased slightly over the quarter. I'm just wondering if you could walk us through that, but I did see that the U.S. office exposure is down, which I think is good. And then my other question would just be about rate sensitivity, and if you could walk us through your +1% NII growth outlook for this year, and maybe longer term, where you think NII goes as rates come down. Thank you.
Thanks, Simon. David, you want to start and then Andrew?
Yeah, so in the U.S., growth on commercial real estate is driven by residential. And so we've seen, you know, opportunities with, in single-family homes with, warehouse lending, and that's primarily the driver. So low, you know, low LTVs, coordinated or senior, warehouse for, single-family mortgages.
And for you?
Yeah, on the NII sensitivity, the 1% guidance is based on the current rate forwards for 2024. If you extrapolate, a simple way to think about it is the net interest margin average was 290 basis points in 2023, and we expect almost the same, 290 basis points to be in 2024. So it's really a function then of the loan growth.
Longer term, I mean, as rates come down, what's your sensitivity? Because I think it has changed a bit, right?
It has changed a bit. So we initially said on the way up, 100 basis points translates into EUR 100 million. That is a lower number. It will depend obviously on the timing and, you know, how quickly the rate cuts happen. But I think we'll provide more once we see get a bit clearer picture of what the ECB is doing.
Okay.
Thank you, Simon.
Thank you.
There seems to be no further questions. I would like to hand back to the CEO for closing remarks.
Thank you, operator. Thank you everyone for joining. Today was a little longer, but obviously we had a lot to cover. It has been a very busy start of the year, as well as a very busy fourth quarter. I think our first quarter will also hopefully have quite a bit to review. So thank you guys for being patient, and look forward to talking soon. Take care and have a great day.
This concludes today's conference call. Thank you for participating. You may now disconnect.