Good day, and thank you for standing by. Welcome to the BAWAG Group Q3 twenty twenty-four 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 one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. If you wish to ask a question via the webcast, please use the Q&A box available on the webcast link at any time during the conference. Please be advised that today's conference is being recorded. I would now like to hand the conference over to our first speaker today, Anas Abuzaakouk, CEO. Please go ahead.
Thank you, operator. I hope everyone is doing well this morning. I'm joined by Enver, our CFO. Before we jump into 3 Q results, I'm happy to announce that we received ECB approval for the acquisition of Knab in the Netherlands last Friday. We're excited about welcoming the team, rolling out the integration plans, and pursuing the many opportunities ahead of us. As for third quarter results, let's start on slide three. We delivered net profit of EUR 178 million, EPS of EUR 2.25, and a return on tangible common equity of 24% during the third quarter. Tangible book value per share was EUR 38.48, up by 16% versus prior year and up 3% versus prior quarter.
The operating performance of our business was very strong, with pre-provision profits of EUR 265 million and a cost-income ratio of 32%. Total risk costs were EUR 25 million, translating into a risk cost ratio of 25 basis points. We utilized EUR 10 million of our management overlay, with the remaining ECL management overlay of EUR 70 million. We have a very low NPL ratio of 1% and continue to see solid credit performance across our businesses. In terms of our balance sheet and capital, average customer loans were down 2% and average customer deposits were up 1% quarter over quarter, when excluding the sale of our German Bausparkasse business. Our CET1 ratio landed at 17.2%, up 70 basis points from prior quarter.
After considering the year-to-date dividend accrual of EUR 286 million, we have increased our CET1 target to 12.5%, up 25 basis points, and adjusted our capital distribution threshold to 13% for the years 2024 and 2025. In light of our two strategic acquisitions this year, we have made adjustments to our capital framework, given several moving parts that I will address on the next slide. We have a fortress balance sheet with EUR 15.6 billion of cash, equal to almost 28% of our balance sheet, an LCR of 260%, and overall strong asset quality. We are starting to see a pickup in customer activity across the franchise, albeit customers continue to remain cautious as they adjust to new normal of higher rates.
Given the recent approval of the Knab acquisition, we are increasing our full-year profit before tax target to over EUR 950 million to account for two months of the Knab acquisition. We are also on track to deliver a full-year return on tangible common equity of greater than 20% and a cost-income ratio under 34%. The two acquisitions of Knab and Barclays Consumer Bank Europe will consume approximately EUR 500 million of excess capital, and we forecast to generate over EUR 250 million of pre-tax profit by 2027. Therefore, we are targeting a year-end pro forma CET1 ratio of greater than 14% and excess capital of greater than EUR 200 million.
The first three quarters of the year have been defined by M&A and integration planning, ensuring constant dialogue with the businesses, our regulators, and laying out detailed integration plans. There has been a great deal of work taking place behind the scenes. We're excited about the opportunities ahead and laying the groundwork for success in the quarters ahead of us. On slide four, in terms of capital, this was a very busy quarter with several significant developments that I wanted to highlight. We ended the quarter with a CET1 ratio of 17.2%, up 70 basis points from prior quarter, post-dividend accrual, and another quarter of very strong capital generation. We decided on several key capital items during the quarter, considering our two strategic acquisitions. First, both Knab and Barclays Consumer Bank Europe operate on the standardized approach.
Given these acquisitions will grow our total balance sheet by approximately 35% and our retail and SME business by over 70%, we have taken a decision to return to the standardized approach for our retail and SME business. We informed the ECB of our intentions during the third quarter, which will be formalized in the first quarter of 2025 and have already taken the full impact this quarter, adding over EUR 900 million of RWAs to our retail and SME segment, which was offset by the sale of the German Bausparkasse business, executing a consumer unsecured SRT in lower business volumes. Ultimately, we took this decision to simplify our business, allow for more streamlined integrations and better product alignment across the group, given the convergence of the standardized approach to IRB for our business model.
All of our past acquisitions were on the standardized approach, and we believe this better aligns with our product offering and approach of centralized risk management across the group. As part of our overall capital planning, we plan to continue executing synthetic risk transfers, or SRTs, for both loss mitigation as well as capital relief purposes. Going forward, we will retain our IRB foundation and specialized lending models for our non-retail and SME customer businesses.... Second, given the two concurrent acquisitions, our growing geographic footprint, and the integration work ahead of us over the coming years, we have decided to increase our CET1 target by twenty-five basis points to 12.5%.
We will also limit excess capital distributions for both 2024 and 2025 to over 13%, 50 basis points above our new target, to be both cautious and prudent as we integrate two large and strategic acquisitions. This reflects our disciplined approach to capital allocation and the changing contours of our business. More importantly, we forecast our pro forma year-end CET1 ratio to be over 14%. This takes into account the two strategic acquisitions, the impact of Basel IV, and a strong pipeline of lending opportunities we see in the fourth quarter.
With a year-end pro forma CET1 ratio of greater than 14%, we will have generated gross capital over 360 basis points, deployed approximately EUR 500 million of excess capital towards two strategic acquisitions that will add over EUR 250 million of pre-tax profit by 2027, accrued an annual dividend of at least EUR 400 million, returned our retail and SME business to the standardized approach, addressed the impacts of Basel IV, and will still have over EUR 200 million of excess capital above our new capital distribution threshold of 13% for full year 2024. This is a true testament to the strong profitability and high capital generation of our business. We plan to hold an investor day in tandem with our year-end results on March fourth, 2025, and we'll address potential capital distributions at that point.
On slide five, our retail and SME business delivered third quarter net profit of EUR 131 million, down 4% versus the prior year, and generating a very strong return on tangible common equity of 33% and a cost-income ratio of 32%. Pre-provision profits were EUR 201 million, down 2% compared to the prior year, with operating income up 2% and operating expenses up 12% versus prior year. Risk costs were EUR 25 million. The retail risk cost run rate has now returned to pre-COVID levels as multiple stimulus and government support programs have now expired. We continue to see solid credit performance across the business with an NPL ratio of 2%. We expect continued earnings growth across the retail and SME franchise in 2024, driven by strong operating performance.
Overall, we see muted customer loan growth given low new originations in the mortgage space, offset by growth in consumer and SME. Okay, on Slide 6, our corporates, real estate, and public sector business delivered third quarter net profit of EUR 40 million, down by 6% versus prior year and generating a strong return on tangible common equity of 23% and a cost-income ratio of 26%. Pre-provision profits were EUR 54 million, down 6% versus prior year. Risk costs were effectively zero. However, we used EUR 10 million of our management overlay to address an NPL in our U.S. office exposure, which we have marked conservatively. Despite the office NPL, we continue to see solid credit performance across the business with an NPL ratio of 70 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 built a strong pipeline of new lending opportunities during the third quarter that we anticipate funding in the fourth quarter, focused on both residential and public sector opportunities. On Slide seven, an update on the real estate portfolio. Our real estate portfolio is stable this quarter. The portfolio continues to perform well, reflecting the underlying exposure to residential, logistics, and industrial assets, which make up 69% of the total portfolio and 83% of our total US exposure. Our office exposure in the United States stands at EUR 264 million, down 59% versus the peak in 2022. The remaining portfolio is approximately 70% performing and 30% non-performing.
The performing portfolio has a debt yield of approximately 10%, occupancy levels of approximately 80%, a weighted average lease term of 6 years with solid tenants, and an LTV of approximately 75%. The performing U.S. office exposure represents less than 40 basis points of total assets and 4% of our total real estate exposure. As I've stated many times before, the stress we are seeing in certain asset classes, U.S. office in particular, will differentiate banks in terms of underwriting and asset quality as we see greater dispersion across lending portfolios. With that, I'll hand it over to Enver.
Thank you, Anas. I'll continue on slide 9. A strong quarter with net profit of EUR 178 million and a return on tangible common equity of 24%. While net interest income was down by 1% versus prior quarter, the net commission income remained strong, up by 1% versus prior quarter. Year over year, as well as versus prior quarter, core revenues were down by 1%. Operating expenses were flat in the quarter, and cost income ratios stood at 32.3%. Risk costs were EUR 25 million in the quarter, down by 9% versus prior quarter. We consumed EUR 10 million of the ECL management overlay, which now stands at EUR 70 million. On slide 10, key developments of our balance sheet.
A few things I would highlight here: customer loans were down by 1% in Q3 and 3% year over year, which also led to a decline in risk-weighted assets. This was largely driven by the corporates business. Our customer deposits were up quarter over quarter. Our cash position increased to EUR 15.6 billion this quarter. Cash and cash equivalents make up 28% of the balance sheet, leaving us with a very comfortable liquidity buffer to address potential organic and inorganic market opportunities in the coming quarters. On the next slide, our customer funding, which is made up of customer deposit and triple A-rated mortgage and public sector covered bonds, is flat versus prior quarter at EUR 46.2 billion, with our cash position now at EUR 15.6 billion.
In terms of customer deposits, we have not seen any relevant structural changes in the third quarter, and the overall deposit betas are now at around 35%, which is in line with our expectations. With that, moving on to slide 12, core revenues. Net interest income was down by 1% versus prior quarter, with a very strong net interest margin of 304 basis points. Overall, we have seen lower volumes in the business and an expected pickup of deposit betas from 32% to 35%, leading to a slightly lower net interest income. In terms of net commission income, up by 1% with an overall good performance across securities and payments business in our retail and SME segment. On slide 13, operating expenses are flat in the quarter.
We expect to offset the largest part of inflation increase through further simplification measures, and therefore expect a stable cost base in Q4. This is prior to any impact of M&A. Moving to slide 14, risk costs. Overall, continued strong asset quality with a low NPL ratio of 1%. We booked EUR 25 million of risk costs in the third quarter and hold a management overlay of EUR 17 million. We still expect risk costs in 2024 in the context of 25-30 basis points. On slide 15, given the recent approval of the Knab acquisition, we are updating our full-year profit before tax target to over EUR 950 million to account for two months of the Knab acquisition.
We are fully on track to deliver a return on tangible common equity of greater than 20% and a cost-income ratio of under 34%. We expect a year-end pro forma CET1 ratio of greater than 14%, post two strategic acquisitions, dividend accruals of at least EUR 400 million, post Basel IV impacts, and after return to our retail and SME business to the standardized approach. And with that, let's open the Q&A, please.
Thank you. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. We will now take our first question. Please stand by. And the first question comes from the line of Noemi Peruch from Mediobanca. Please go ahead. Your line is now open.
Good morning. Thank you for taking my questions. My first question is on Knab. The implied run rate from your guidance points at 180 million. Could you please clarify the moving parts of the upgrade and indeed comment on this 180 vis-a-vis your previous indication, which was more than 150 million, if I'm not mistaken? And then on cost, I see that the run rate is plus 5%. Previously, we had the guidance of plus 3%. And could you please give us a bit of details on this, whether you expected you had higher than expected inflation or whether the cost cuts you envisaged were delayed for some reason? My third question is on the move from IRB to standardized. Here, if you could please outline the benefits of the move. Thank you.
Okay. Thank you, Noemi. It was a bit hard to hear, but let me just- I think I'll try to recap. The impact from Knab vis-a-vis our increased upgrade on the pre-tax profits, the OpEx, and then the standardized approach. Okay, I'll take the first, and then, and Enver, you want to take the OpEx?
Sure, yeah.
Noemi, the Knab acquisition factors in two months. Hopefully closing is in the next few days. You should read from that, obviously, the upgrade is in large part resulting from the Knab acquisition. Now, when we signed the acquisition, we gave guidance of over EUR 150 million of pre-tax profit. There's a lot of moving parts, the most significant is the interest rate environment next year. We will provide more guidance in terms of the accretion that takes place from the Knab acquisition during the capital markets day, but suffice it to say, from our initial pro forma, things look, I think, more positive than what we had initially anticipated when we communicated the signing earlier in the year. You want to take the OpEx?
Yeah. So the second question was on OpEx. I believe it was our guidance is 3% year over year versus a run rate of 5%. I think it's somewhere in the middle. I think it's going to be around 4%. So not really a big difference. The main reason for that is just having higher costs for integrating the businesses, Knab and Barclays this year. I think on inflation, there was obviously the effect, but it wasn't as expected. So yeah, there is going to be probably a bit one percentage point higher run rate on the OpEx than what we said before... I think the third question was IRB, where the standard, the standardized approach. I think there are multiple benefits.
One of them is all the recent acquisitions that we have done are on standardized approach, so our natural actually approach is standardized approach. Two thirds of the book before the acquisitions are on standardized approach. It will simplify the overall structure for us, and we also believe the growth is going to be in the standardized approach. Also, keep in mind, we have been doing, you know, from a risk management perspective and also from a pricing and managing perspective, we have always underwritten things based also on standardized approach. So for us, it is really simplification of the overall IRB landscape.
Thank you. If I may, I have a follow-up on the cost answer.
Yeah.
If the higher costs are related to the integration, shall we consider that 1% of higher growth as non-recurrent? Thank you.
I didn't understand.
I would just say no. I mean, instead of splitting hairs in terms of... I think Enver gave kind of the guidance for the year. I think it's more important, what does the trajectory look like into 2025, vis-à-vis your OpEx with the two acquisitions, as well as we'll try to break out kind of the underlying. But, to be quite frank, it's a bit of a rounding error, I think is what you're focusing on, and what's more important is what is the actual cost-income ratio and the OpEx development for 2025 and beyond. Thank you.
Thank you.
Thank you. We will now take our next question. And the next question comes from the line of Mehmet Sevim from JP Morgan. Please go ahead. Your line is now open.
Good morning, Anas. Good morning, Enver. I hope you're well. I have three questions, please. First of all, in your capital trajectory, you're signaling a strong lending pipeline for the fourth quarter. And, I was just wondering where you see the lending opportunities given the muted momentum recently. Does this imply an improved lending appetite on your side, or have you adjusted your credit box? And, maybe can we read this as an early signal of the end of the weak momentum that we've seen recently? And, my second question would be on the NII sensitivity. If you could kindly provide us with an update on the group sensitivity for next year, considering the recent moves, maybe at least at a core level, that would be super helpful.
And, finally, on Basel IV impact, if I'm not mistaken, the guided impact was de minimis recently. So, I was just wondering what's changed there, and if you could clarify the exact expected impact and where it comes from. Thanks very much.
Great. Thank you, Mehmet. I will take the first on lending opportunities, then I guess NII, and then we can also both address Basel IV.
Yeah.
Mehmet, on the lending opportunities, I think we probably hit a trough in the third quarter, and why I say that confidently is we have a pretty robust pipeline, more so in the non-retail. So this is kind of corporates, real estate, public sector. Within that specifically, we see a number of resi opportunities, which is. We've always been positive on that kind of space, but we're finally starting to see term sheets signed. There seems to be more movement there. A lot of it's also refinancing opportunities, which is great, because you come into existing cash flow generating opportunities, so that would be great. Public sector, we're seeing some movement there, so we're quite bullish on that front.
I think corporates, too, we probably hit a low point in the third quarter, but that's also, that's been an area the past few years. I think absent a change in kind of just the risk-adjusted returns, it's gonna be hard for us to compete, but obviously, we're always gonna be focused on trying to be able to extend credit in that space. You had mentioned an adjustment to credit box. Absolutely not. If anything, we've probably been more conservative, but we see some really interesting opportunities. On the retail side, we mentioned it during the call, look, mortgage originations has been muted the past year and a half, really, corresponding with the increase in rates. I think we'll start to see that pick up, really going into 2025.
Where we see good opportunities is in the non-mortgage, consumer and SME. That's across leasing, factoring, a number of other areas, you know, across our business, personal loans, and cards. So I think, third quarter, in general, is probably the trough in terms of lending, and we'll start to see, increased customer activity across the board. You want to take NII?
Yeah. Mehmet, on NII sensitivity, so the way we look at it is the first hundred basis points, so going from four hundred to three hundred basis point level, are going to be de minimis. I mean, we can see it already now after three rate cuts. The net interest margin was really holding up quite well. The next hundred basis points, going from three hundred to two hundred, will have an impact on net interest margin. Not as pronounced as we have seen it on the way up. It's going to be less of an impact. Having said that, we will see a bit of a NIM compression, but that will be offset by obviously, M&A and also you know, the lending pipeline that looks really good.
So long way of saying that NII will be growing from now on, you know, for the rest of the year, but also into 2025. So small NIM compression, growing NII for the next couple of quarters.
And Basel?
Basel IV, nothing changed. You know, we said de minimis, and it is going to be de minimis.
... we just put it in as part of the Q4 pro forma. That's also we plan to disclose it. So year-end should really capture all known impacts from standard, from Basel IV, from both acquisitions, from everything. So we have a clean picture by year-end, and can take that as a starting point for, you know, excess capital discussions.
That's very clear. Thanks very much.
Thanks, Mehmet.
We will now take our next question, and the next question comes from the line of Mate Nemes from UBS. Please go ahead. Your line is now open.
Yes, good morning, and thank you for the presentation. I have two questions, please. The first one would be on the capital side of things. So, would you be able to provide us a bridge or kind of walk from the 17.2% CET1 as of the end of Q3 to the north of 14% pro forma number by year-end? I hear you on the acquisition impact, some diminishing impact from Basel IV, but if you could lay out that bridge, that would be very helpful. The second question is on the office portfolio in the U.S., that has declined by 30%, and I think you have used EUR 10 million of overlays for an NPL case. Could you talk about how do you see the quality of that book, and whether you have any other potential situation there? What do we expect into provisioning in that segment? Thank you.
Thanks, Mate. Enver, you want to take the capital?
Sure, the capital.
and I'll take the office.
Yeah. So I think, Mate, in a simple way, how to think about it is you have the regular earnings, you have the dividend accrual, so call that 40-50 basis points net that we are going to accrete it in Q4. And the rest, that's why we gave also the RWA guidance, comes from the RWA piece, you know, going from 17.8 to 22.5. And these combined will get you 72. We kept it a bit open, above 14% is what we believe. The majority of that RWA is really tied to the M&A activity. This is assuming both deals in that number.
Mate, as it relates to office, what we tried to do is to address your question, kind of where do we see kind of things developing. We took kind of a look back, the peak of the U.S. office exposure, which is the most acutely distressed asset class that we've seen in quite some time, was about 640 million. That's down almost 60%. So we're down to 260 million plus, of which over seventy, call it 70% is performing. We gave the stats on the performing, and the non-performing is around about 80 million EUR or so. But if you go from the 640 down to where we are today, we've taken almost 30 million of our management overlay, really applied to U.S. office.
You can say that's, call it 4.5%-5% loss rate. We hope to be able to recover that as we, recapitalize, or those assets have been recapitalized because of the cash flows. But I think more importantly, I've said this before, the worst is behind us, as we see the remaining portfolio and the amortizations and the refinancings, but it is still a very distressed asset class. And it goes back to your day one underwriting. I think you'll be able to see the quality of that underwriting, the advance rates, the sponsors that you work with, the permanency of the cash flows. And look, I think one thing that we have as an advantage, and this doesn't, this informs how we look at the different assets, is we're not worried about an NPL.
We're worried more about asset recovery and making sure that we're making the right decisions as it relates to that particular asset. So we try to avoid any of these extensions that are uneconomical. We try to preserve our position, and we try to work with sponsors, existing or new sponsors that put in equity, that help with the overall asset recovery. And I think that's, that approach has served us well. I think it has more to do, honestly, with the day one underwriting than anything else. But if you get that right, I think then you have optionality day two, and that's what we've seen with the portfolio. So we feel really good about the one eighty. Never say never, but I think all things considered this should hopefully be behind us.
Thank you.
Thank you. We will now take our next question. Please stand by. And the next question comes from the line of Gabor Kemeny from Autonomous Research. Please go ahead, your line is now open.
Hi, hi, team. A couple of follow-ups left from me. One is on the NII guidance. Enver, when you said you expect the NII to grow next year, was that on a like-for-like basis or including the M&A? And if the latter, could you please share any thoughts on the like-for-like development? And the other question was a follow-up on the U.S. office. I mean, what do you think is the likelihood of more provisioning over Q4? I mean, up to 30 basis points of provision guidance leaves room for more P&L provisions. You have EUR 70 million of overlays. Why would you not get over with writing off this portfolio? Thank you.
Gabor, sorry, again, the line was a bit hard, but I'll, I'll take the office. I think your question was, is there any more provisions expected?
Yeah.
No. I think the $30 million that we've taken on office over the past two years, that is sufficient. I mean, never say never, but we feel pretty confident, definitely for the fourth quarter. And then there was a question.
Yeah, I think you asked, like, NII projection, that does include M&A. I just said there's going to be some NIM compression, limited from just the rate cuts, but that will be more than offset by the new business and obviously the M&A transactions.
Got it. Thank you.
You're welcome.
Thank you. We will now take our next question, and the next question comes from the line of Johannes Thormann from HSBC. Please go ahead, your line is now open.
Morning, everybody. Some follow-up questions from my side as well. First of all, on NII again. If we look at Q4 and your guidance of an uplift on absolute levels versus Q3, can you give some more details what is changing in the new business and the underlying business, despite the rate cuts that you expect an uplift versus Q3? And then probably just running ahead or looking ahead on the Knab contribution, if we look at their annual report, this would suggest that a monthly NII contribution is something like EUR 30 million per month. Is that fair to assume?
Secondly, on the risk side, you clearly reduced the office exposure in the U.S., but seemingly you kept the European office exposure relatively stable, if I do a rough calculation on the numbers page of page seven. What is the differences in between those asset classes in your view? Probably just on looking a bit ahead, if we take the risk profile of Dutch mortgages, your cost of risk in the next year should come down from this year's level. Is that fair to assume?
Thanks, Johannes. I'll have Enver, you want to take the-
I'll take the first one, maybe.
The first one, the last one, I'll take. I'll take the office.
Yeah, sure. So the first one, Johannes, the underlying NII, so assuming no acquisitions, is going to be very, very stable in Q4 compared to Q3. So the uplift in NII purely comes from the Knab acquisition to two months that you're having. On the guidance, what Knab will contribute, I think it would make sense to probably do an analyst call between now and the capital markets day, just to give you guys a bit more details around the composition of the P&L. But just so we are about to close it only in the next few days, and once we are done with the analysis, we will then do a follow-up call. Risk concentration, I think the question was, will the risk concentration be lower given the Knab acquisition? I think-
It'll dilute the risk.
It'll dilute, obviously, you know, just given they are all mortgages. On the other side, once we have closed Barclays, that is some, you know, high risk concentration business, also high margin business. So we think that's gonna be almost a natural offset. One will dilute, one will increase. All part will be at very, very similar levels as of today.
And then, Johannes, I think you asked about just office in general, not just the U.S.
Yeah.
If you just go back to 2022, the total office exposure, when U.S. was EUR 640 million, it was about EUR 1 billion in Europe, because it was a quarter of our EUR 6 billion real estate portfolio. If you now move forward since that point in time, we've deleveraged the U.S. office from 640 to 260, as I mentioned, and went through the dynamics, and we feel pretty good about where we stand. But equally as important, I think it was a good question that you raised, is the European office exposure went from a billion to slightly over EUR 500 million. No losses. The issues in Europe are fundamentally different than the U.S.
So in the U.S., secular change in U.S. office is really, I think, the work from home has been a real drag or an albatross on U.S. office buildings. And then you couple on top of that, more aged buildings that have been hollowed out in some of these metropolitan areas, and that's been a real issue, a real challenge. In Europe, it's not the work from home as much, it's just the cap rates that people lent at. Pre-rise in interest rates were 2%-3%. They were ridiculously low. We've always said that we never lent into that environment, but the actual cash flows are quite stable, and that I think, more than anything else. So if you got the underwriting right day one, I think you'll be fine.
It's the folks who lent into 2-3% cap rates that are gonna have real issues, because you're gonna see a rejiggering of the capital structure for those office buildings, and we're fine on that front. So Europe has actually been a really positive development, and the U.S. has been the one that I've always highlighted that's acutely distressed, and I think the worst that's behind us, so... But good question. Thank you.
Thank you.
Thank you. We will now take our next question. The next question comes from the line of Jeremy Sigee from BNP Paribas. Please go ahead, your line is now open.
Thank you. Thanks so much, and good morning. Could I just pick a bit more at the NII outlook? You said that the reduction from 300 to 200 basis points, ECB rate has some impact. Could you give us a rough idea of how much that impact is on the like-for-like book, just so that we can understand the sensitivity of that move? And then the second question on NII is, could you just give us an update on the structural hedge, the size of that hedge, and the yield that is sort of currently being returned and what that might step up to?
Jeremy, I will hand this one to Enver. So-
Yeah, so we have not disclosed anything, Jeremy, in terms of analysis or clarity, but as I said, it's fair to say first hundred basis points, almost no impact, second hundred, far less than what we had previously, and the previous impact, if you go back, was we went from two hundred and thirty-five basis points to three hundred, pre-rates and post-rates. Most of it will be conserved. There is a bit of a timing topic to it, and you pointed to it. It's a structural hedge, so if rate cuts come as they are forecasted, which is gonna be very quick, we cannot absorb the full impact of it in twenty-five. That's why we'll see some NIM compression.
But looking into 2026 and 2027, you know, everything else static, we will pretty much recover most of that effect through the structural hedge in the coming years. So stable, small dip in 2025, recovery in 2026, pretty much kind of recovered in 2027. That's how the kind of mechanics are, and then actually growing then in the outer years. Like for like, no M&A, nothing else happened in the world. How the structural hedge is designed is basically we have a 40% very short overnight, up to three months. That is to absorb the deposit betas, and the remaining 60% is split. A majority of that is in the longer term hedge, which is ten-year rolling. And then we have a three-year roll out hedge, which is supporting some of that recovery that I mentioned of the second kind of rate cut away. That's the design of it. And then don't forget, you got to factor in obviously the M&A-
Yeah.
- and then the increased volumes that we were just kind of highlighting. So that's why I think waiting for the Capital Markets Day, absent just kind of looking at things that are like for like-
Yeah
... might not provide the best picture, kind of the go forward, because there's a lot of moving parts, but we also understand the nature of the question. Thank you, Jeremy.
Thanks. That's very helpful. Can I just ask a quick follow-up? Your comments sort of implied a shift away from M&A with these two big acquisitions to digest and possibly more of a sort of share buyback kind of emphasis. Is that a fair interpretation, or is it still wait and see?
No, Jeremy, I would say, look, we have two strategic acquisitions. They're gonna add over 35% to our balance sheet. We need to fully digest and absorb the acquisitions. So there's a lot on the integration front. M&A is a key plank to our business model. I think we've demonstrated that with almost over 14 acquisitions over the past decade, and buybacks are a key plank, and what we do with our excess capital. So they'll go hand in hand. But the reality is we're focused on integration for the foreseeable future, at least from an M&A standpoint, so.
Very good. Thank you.
Thank you. We will now take our next question. And the next question comes from the line of Tobias Lukesch from Kepler Cheuvreux. Please go ahead. Your line is now open.
Yes, good morning. Just two follow-up questions on my side, please, around capital. In terms of the RWA growth from potential lending in Q4, maybe is that relevant in the fact that it would be relevant to point out maybe what an impact that is? And thinking about the capital ratio guidance above 14%, CET1 ratio on the pro forma for the financial year 2024, is it fair to assume that this ratio might be even closer to 15% than the 14%? Thank you.
In terms of just volumes, I think it's-
Yeah, I think, yeah, Tobias. So on the RWA role from lending, it plays a role in the overall RWA outlook we provided for Q4, but much bigger is obviously the M&A piece. But both are considered completely in the RWA number. We can't give more on the CET1 ratio than just saying over 14%, because there are still moving parts. So it would not be fair to give any more guidance than that.
Mm-hmm. Tobias, there's a-
Okay.
I mentioned there's a strong pipeline, but term sheet to actual funding, you don't control that, so I think it would be more prudent to wait till year-end, because we'll actually have a firm figure, but we thought giving over 14% would be good guidance, at least directionally, for you guys to work with.
Yeah. Understood. Thank you, and maybe a follow-up on the U.S. office as well. The big reduction basically of the U.S. office portfolio by EUR 112 million, how was that exactly achieved in Q3?
Yeah. Tobias, that one was one where NPL that went to REO, recapitalized, new equity investors, and we feel pretty good about that, particular position.
At the end of the day, this was sold?
This was, new investors were brought into the asset, but we continue to be in the asset, so.
Okay, so your portion dramatically dropped basically from having... That was potentially not a whole loan you had or because I guess you were rather in the syndicated space there, right?
Tobias, that one was one we marked before. We were conservative in our mark. We had marked it under 50% LTV, on current valuations, so we feel pretty good about the recovery on that end. But what we're more, I guess, positive on is you have new equity investors that came in, that will be able to manage the asset, as opposed to letting the asset drift, and that's important in terms of any office exposure, that you have the right sponsors and equity guys behind it, so.
This really dropped the exposure by 112 million for the performing side?
About EUR 112 million.
I'm just puzzled, you know, like, by the sum, because a single loan should normally not drop your performing exposure by 112 million.
I think there's FX. It's not a hundred and twelve, but there's a couple of FX movements and amortizations, but it was the NPL from last year, last quarter, that went into REO.
... So for the NPL minus ten. Yeah, it is a majority impact, basically, but then, I mean, there was not a big sale-
Yeah.
-kind of, right? Or any SRT.
Oh, no, no. It was the majority of this was actually going to REO. But that's. I, I don't think it's year-over-year. That's why I'm cautious not to give you the... Because there were some amortizations as well as just FX adjustments, so.
Okay. But yeah, the majority is REO. That's Tobias. Yeah.
Okay.
Good question.
Thank you.
Thank you.
Thank you. We will now take our next question. And the next question comes from the line of Hugo Cruz from KBW. Please go ahead. Your line is now open.
Hi. Thank you. You already answered a lot of questions. I just have one more. The big increase in cash and cash equivalents in 3Q, did this have a material positive impact on the NII? And how do you expect the cash number to look like in Q4? And what really, why do you increase this so much? Thank you.
Hugo, no, it didn't have any positive impact. So we are just then giving to the ECB, so it's left pocket, right pocket. That's where we move. We issued quite a bit, and we had an increase of deposits. So we issued AT1 and Senior Preferred. That was EUR 1 billion with private placements, and also customer deposits went up while the lending was a bit slower, so that in combination gives you a higher cash balance. We might expect slightly lower, just giving, you know, pickup in lending, but the acquisitions are bringing new cash to the balance sheet. So total, probably the balance will not change dramatically. Hopefully, just, you know, from a relative perspective, 28% might drop, you know, once we added the two businesses.
Just to add on, and the EUR 1 billion that we issued between the AT1 as well as Senior Preferred, that was really in anticipation of the two M&A. So we're trying to get ahead of it in terms of MREL and just different requirements. But yes, almost 30% of the balance sheet's in cash, and hopefully we can start being able to deploy that.
All right. Thank you.
Thank you. We will now take our next question. And the next question comes from the line of Chris Hallam from Goldman Sachs. Please go ahead, your line is now open.
Hi. Just two quick follow-ups left from me. So first on betas, 35% or around 35% in the quarter. Just how much of the change Q on Q there is the reference rate versus your deposit rates? And then obviously, the kind of closing is gonna impact that slightly, but on an organic basis, how would you expect betas to move through to year-end? And then second, and again, sorry to come back on back on Knab, but the accretion that I guess we're looking at in the guidance change this morning, just if I try and isolate that EUR 25 million or so, is there any seasonality or episodic items in the final two months of the year to be aware of?
You talked about the rates kind of picture into next year for this, but just any one-offs in that November, December number we need to be aware of?
On the first one, Chris, on the betas, so the increase is purely driven by the reference rate. Nothing to do with the customer yield. The customer yield is actually coming down, so the expansion for customers is going down, and the reference rate is going down a bit quicker. And now that's gonna be the, you know, the question for the next coming quarters: How quickly can we adjust to the new rate? The comps is out, there's nothing seasonal. The only thing I would keep in mind, they are having a record year, just given, you know, the overall rate environment, and they benefited significantly on the deposit margin. That is not going to be the case for the coming years, but that's reflected in all our numbers and our forecasts.
Got it. Thank you.
Thanks, Chris.
We will now take our next question. Please stand by, and the next question comes from the line of Jovan Sikimic from RBI. Please go ahead. Your line is now open.
Yes. Good morning once again. I just have, I think, really a minor one. I think a couple of days or weeks ago, we read about the interest in Mercedes-Benz Bank portfolio in Austria. Can you maybe share some kind of details or what's your plan on that? And I think, I suppose it is quite a small transaction. Should be, right?
Hi, Jovan. Yes, you're absolutely right. Very small transaction, under EUR 100 million portfolio size, which should be closing late fourth quarter, early first quarter. But really, it's less M&A. I know there was a whole discussion of mergers. It's less M&A, just more acquiring assets, so.
Yeah. Okay. Okay.
Thank you.
Thank you.
Thanks, Jovan.
Thank you. As there are no further questions, I would now like to hand back to Anas Abuzaakouk for any closing remarks.
Thank you, operator. Thank you everyone for attending today's call. Thank you for the many questions. Thought it was pretty robust. We look forward to hosting everybody for our Capital Markets Day on March 4th, 2025 . And as well, that's gonna be coupled with our year-end results, and there's gonna be a lot to cover. So thanks, everybody. Have a great rest of the year, and we'll catch up soon. Take care.
This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.