Good day, and thank you for standing by. Welcome to the BAWAG Group Second Quarter 2025 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 this 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. Please be advised that today's conference is being recorded. There will also be a transcript published to the website. I would now like to hand the conference over to your speaker today, Anas Abuzaakouk, Chief Executive Officer. Please go ahead.
Thank you, Operator. I hope everyone is doing well this morning. I'm joined by Enver, our CFO. Let us start with a summary of the second quarter results on slide three. We delivered net profit of EUR 210 million, earnings per share of EUR 2.65, and a return on tangible common equity of 28% during the quarter. The performance of our business was strong, with operating income of EUR 552 million, up 41% versus the prior year, pre-provision profits of EUR 345 million, and a cost-income ratio of 37%. Total risk costs were EUR 52 million, translating into a risk-cost ratio of 37 basis points, as we continue to see solid credit performance across our businesses. In terms of our balance sheet and capital, average customer loans were up 3%, and average customer deposits were up 1% quarter over quarter.
We have a fortress balance sheet with EUR 15 billion in cash, an LCR of 237%, and overall strong asset quality with a low NPL ratio of 68 basis points. We recently received regulatory approval for a share buyback of EUR 175 million, in line with our capital distribution target of over 13% through 2025, landing at a CET1 ratio of 13.5% after deducting the buyback and the dividend accrual in the second quarter. The operating performance of the businesses across the group was solid, but we continue to be patient and disciplined, with over 20% of our balance sheet in cash in a market environment where we believe credit is frothy. The integrations of both Knab and Barclays Consumer Bank Europe are progressing well. There has been a great deal of work taking place behind the scenes.
Our focus is on building a solid foundation to drive profitable growth long into the future. On the Knab front, we aim to have exited all transitional service agreements by the end of the third quarter and have already applied for a merger of the bank, the so-called branchification, which we hope to have completed by the end of this year. Barclays Consumer Bank Europe, which will be rebranded to Easy Bank Germany in 2026, has been progressing very well. The leadership team has been onboarded, and the business continues to develop ahead of plan. Our goal with both integrations is clear: fully integrate into the group operating framework and culture, work as one team, and speak with one voice. We're excited about leveraging best practices, providing top talent with broader roles, and pursuing the many growth opportunities ahead of us. Moving now to slide four, capital development.
At the end of the second quarter, our CET1 ratio was 13.5% after deducting EUR 175 million for the approved share buyback program and EUR 116 million second quarter dividend accrual. For the quarter, we generated 100 basis points of gross capital, of which 91 basis points was through earnings. We have excess capital of EUR 117 million, 50 basis points above our capital distribution target of 13% in 2025. In terms of any Basel IV output floor impacts, we have zero RWA inflation, as we have a buffer of 20 points to the output floor level, given that 90% of our business is currently on the standardized approach. Onto slide five, our retail and SME business delivered first quarter net profit of EUR 173 million, up 32% versus the prior year, and generating a very strong return on tangible common equity of 35% and a cost-income ratio of 38%.
Pre-provision profits were EUR 289 million, up 44% compared to the prior year. The retail risk costs were EUR 53 million, with a risk-cost ratio of 56 basis points. We continue to see solid credit performance across the business, with an NPL ratio of 1.1%. We expect continued growth across the retail and SME franchise in 2025, driven by strong operating performance as we fully integrate the two acquisitions, with solid growth in consumer and SME, which will offset muted mortgage loan growth given current pricing levels. On slide six, our corporate real estate and public sector business delivered second quarter net profit of EUR 38 million, down 9% versus the prior year, and generating a strong return on tangible common equity of 31% and a cost-income ratio of 25%. Pre-provision profits were EUR 52 million, down 12% versus prior year.
Risk costs were a positive EUR 1 million, as we continue to see solid credit performance across the business, with an NPL ratio of 10 basis points, down 50 basis points from the prior quarter. This is best reflected in our U.S. office exposure, which was down 54% during the quarter, with the remaining portfolio of EUR 143 million of performing loans, equal to approximately 20 basis points of total assets and 3% of total real estate assets. Since the onset of the rise of rising U.S. interest rates in March 2022 and the subsequent distress in the U.S. office market, we have reduced our office portfolio by approximately 80% in what is arguably the most distressed asset class we've seen since the Great Financial Crisis.
When we say we are a lender focused on risk-adjusted returns, this is not a cliché, but a reflection of our discipline, conservatism, and long-term focus of both our markets and risk teams. We will stay patient and continue to focus on conservative underwriting, risk-adjusted returns, and not blindly chasing volume growth. With that, I'll hand it over to Enver.
Thank you, Anas. I will continue on slide eight. A strong quarter with net profit of EUR 210 million and a return on tangible common equity of 27.6%. Core revenues were up 2% versus prior quarter, with net interest income up 3% and net commission income up 1%. Operating expenses were up 5% in the quarter, and cost-income ratio stood at 37.5%. Risk costs were EUR 52 million, or 37 basis points, down 12% versus prior quarter. The tax rate in the second quarter was 26%, reflecting our growth outside of Austria. With higher corporate tax rates in the Netherlands and Germany, we expect the tax rate to remain at this level. On slide nine, key developments of our balance sheet. Major balance sheet items remained flat this quarter, with averages increasing on the back of the full quarter inclusion of the most recent acquisition.
With our cash position continuing to be greater than 20% of our balance sheet, we have a very comfortable liquidity buffer to address potential organic and inorganic market opportunities when they arise. Having said that, we'll stay patient and continue to focus on risk-adjusted returns and not blindly chasing volume growth. Core revenue developments on page 10. Net interest income was up by 3% in the second quarter. Despite having a full quarter of the credit cards business in Germany, net interest income also reflects the impact of the low interest rate environment, with the average three-month arrival down 50 basis points during the quarter, leading to high deposit betas of 48%, four points higher versus prior quarter.
With rates slowly but surely coming close to the terminal rate and overall solid margin development across our businesses and further deposit repricing, we expect the second quarter NII to be a good run rate for the remainder of the year. The net commission income was up 1%, reflecting the positive trend we have seen over the last couple of quarters, and we expect a similar run rate for the rest of 2025. On page 11, operating expenses up 5% in the quarter, reflecting mainly two effects. One, our new baseline of the larger group, and two, salary indexation after the collective bargaining agreement in Austria came into effect on April 1st, with a 3.15% wage inflation.
We believe that we have seen the peak of operating expenses in the second quarter, and we have made further progress on the integration of our acquisitions, and we expect our cost base to start coming down in the third quarter. We reconfirm our full year outlook of approximately EUR 800 million of operating expenses. On the regulatory charges, they were EUR 10 million in the quarter, and we expect it to be around EUR 40 million for the full year. Moving to page 12, risk costs were down to EUR 52 million in the quarter, in line with our expectations. Asset quality remained strong with an NPL ratio of 70 basis points. We continue to see a robust credit performance and expect risk costs of approximately 40 basis points for the full year. Let me close with the outlook and targets on page 13.
We reconfirm our P&L outlook and targets for 2025, with a net profit of EUR 800 million and earnings per share of above EUR 10. With that, let's open up for Q&A.
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 take our first question. Your first question comes from the line of Gabor Kemeny from Autonomous. Please go ahead. Your line is open.
Hi, team. Thank you for the presentation. My first question is on NII and your stable NII outlook for the rest of the year. Can you elaborate, please, a little bit on the assumptions here? In particular, what sort of NII tailwind do you see from deposit repricing? I believe you indicated you are pricing new interest-bearing deposits around 1%. If you could quantify the NII benefit from the repricing, that would be helpful. On the rate outlook, I believe you are assuming something like a 1.7% terminal rate. How sensitive would your NII outlook be to, let's say, one or two more rate cuts than you assume? My final question would be on capital. Share with model, anything, any unusual developments in your capital ratios over the second half beside the usual items like an SRT or any other transactions you are working on? Thank you.
Thanks, Gabor. Enver, you'll get to do the NII, and I'll do the capital.
Okay, perfect. Gabor, the trend for the rest of the year on the NII. You're right. We expect another rate cut to happen. That's our current assumption. If you look at the overall NIM development over the last couple of quarters, I think it's very obvious that we are less sensitive to rate cuts, but there's obviously an element of that going into the NII projection. On your specific question, if you're sensitive to two rate cuts versus one rate cut, I don't think that would play a big role. It might just be quarterly timing. We feel very confident that the current run is sustainable. I think we are fairly cautious on these assumptions. There are a few things that could be better than what we expect right now. It's the deposit repricing. We see the general market trend on deposit repricing that we follow right now.
It just takes time. The deposit hedge takes time. It is a positive tailwind. Overall, we have seen a bit of a drop in business on the non-retail side. Also, I think there's more momentum in the second half that could drive the NII outwards. Overall, I think fairly cautious, but right now, our best estimate is to have a stable NII.
Gabor, on the capital side, I'd say. The proxy of 100 basis points of gross capital for the quarter, 90 of which is earnings, that's a good launchpad. Then as far as SRTs, we're projecting two in the second half, one in the third quarter, one in the fourth quarter. You'll see probably continued healthy capital development. In terms of M&A or anything, if that's what you were alluding to, nothing significant for this year.
Maybe just to add on the SRTs, we would provide more details if the transactions materialize or propose.
Yeah. Thanks, Gabor.
Thank you. Just one more follow-up, if I may, please. What is the average rate on your interest-bearing deposits, the backbook right now?
We are paying pretty much 1% on the EUR 50 billion or so of customer deposits on average.
Got it. Thank you.
Thank you.
Thank you. We will take our next question. Your next question comes from the line of Gulnara Saitkulova from Morgan Stanley. Please go ahead. Your line is open.
Hi, good morning. Thank you for taking my questions. My questions are on M&A. Given the strong capital position and the ongoing integration of Barclays' German consumer business, and Knab, when it would be feasible for BAWAG to reinitiate M&A activity? You mentioned you are not expecting anything particular in the second half of the year. When would be the perfect timing for you to restart M&A? How are current global geopolitical uncertainties, including the potential tariffs and macro volatility, influencing your investment appetite and M&A considerations? The second question also related to M&A. You have emphasized a focus on the retail banking and SME in the DACH region as your core strategic priority. Is it still the case going forward, or would you ever consider expanding your scope, for example, through acquisitions outside Europe, such as in the U.S. ? Thank you.
Thanks, Gulnara. Very good questions. On the M&A front. As I stated earlier, 2025 is about landing the integrations. So anything on the M&A front, it would be small. If anything, as far as kind of bolt-on acquisitions. I think once the acquisitions are landed and we're in a firm position. We have a game board. Obviously, we're tracking a number of opportunities. We'll re-engage with the game board in 2026. There's a lead time to M&A. That takes about six to nine months even to actively source a deal. There was a question in terms of the DACH/NL region. That's been the bulk of the M&A that we have executed, but we also look in Western Europe, and we've done the acquisition of Idaho First Bank in the States. We look at platforms.
We look at bolt-on opportunities across the seven markets, both DACH/NL and Western Europe and the United States.
Thank you.
Thank you.
Thank you. We will take our next question. Your next question comes from the line of Noemi Peruch from Mediobanca . Please go ahead. Your line is open.
Thank you for taking my question. I have three. The first one is on the lever risk in Austria. If you could share with us the range of potential top-up and provision you expect for 2025, it would be useful. Here, I wonder about your preference, if it is more towards an upfront cost, perhaps, or kind of taking provision as claims come in, so potentially spreading into 2026. My second question is on asset quality. We have seen in the last quarters an increase in bankruptcies in Austria and also the local regulator quite vocal on commercial real estate risks. I was wondering here, how do you see these trends impacting your book and if you expect customer risks to exceed 40 bp s in the next years? Finally, a follow-up on the deposit cost. What's the duration of the term deposit right now?
Is repricing tougher in the Netherlands at the moment or in Austria? Thank you very much.
Thanks, Noemi. We had a hard time hearing the question, so let me just try to recap, and we'll distribute it between myself and Enver. The first was on the legal fees, I think, the upfront fees.
Yes.
In Austria. The second was, was it commercial real estate that you asked about, or?
Risk of guidance, was it?
Asset quality in general.
Noemi?
In Austria and on the quarter.
In Austria, asset quality? Okay. Really hard to hear your line.
Yeah. If this could trigger a higher cost of risk in the next years, perhaps.
Okay. Gotcha. Asset quality. And then the third one was what? Deposit pricing?
I guess so, yes.
Okay. Let me just on the legal fees. Honestly, this is one where I think that the headlines far outpace the actual reality. We reached an amicable settlement with the Consumer Protection Bureau, and we think we've adequately addressed it. I think sometimes the sensationalization of headlines sometimes overruns the actual substance of the topic. We've addressed that. The second one, asset quality, I'd say in general, look, we're under 70 basis points. We see solid credit performance. The bigger issue is not so much what we see today on book. I think the numbers speak for themselves. It's just the frothiness in the market. I would be more concerned less about, at least from a BAWAG perspective, what's on book. It's just about the aggressiveness in terms of higher advance rates, lower margins as people are chasing volume.
I see that as a bigger concern as opposed to kind of what we see from our balance sheet perspective. The third, I will give it to you, Enver.
Deposit costs?
Yeah.
Yeah, we have seen the trend that deposit costs are coming down across markets from Netherlands, Germany, to Austria. Just a bit slower than the rate cuts. I think what I said before, once we hit the terminal rate, we will see a positive tailwind of the continuous deposit repricing that we would expect to continue in all the markets. I think you asked about term deposits. It's a very small fraction of our overall customer deposit base and has almost no impact on pricing or repricing.
Thanks, Noemi.
Thank you.
Hello, good morning.
Your next question comes from the line of Borja Ramirez from Citi. Please go ahead. Your line is open.
Hello, good morning. Can you hear me?
Hey, Borja, can you speak up a bit? It's very hard to understand you.
Yes, of course. Can you hear me a little better?
It's a bit better.
Understood. Thank you for your time. I have two questions, please. Firstly, on the NII. I understand that your guidance is conservative based on the ECB rate of 1.7%. Also, the deposit beta. Could you provide details on where you see the deposit beta in the medium term? That would be my first question. My second question would be on the integration of Knab. As per your presentation, the TSAs will be exited by third quarter and you will target bank merger classification by year-end. I would like to ask if this would mean any potential upside to the efficiency target and also to the stability from the acquisition. Those are my two questions.
Okay. I'll take the second one. Again, sorry, it was really hard to hear. I think we have a bad line, but. As it relates to the Knab integration, yes, the TSAs are being closed up by third quarter. Hopefully, the merger done by the end of the year. In terms of changing the targets, we're still the investor-day targets, under EUR 800 million. Under 33% cost-income ratio. Hopefully, we will beat that. I think we feel comfortable in just the plans that we've put out. If there's an update in the coming quarters, we'll update you guys. Everything is on plan.
I think the first question was on our projections on deposit betas. We do not provide that detail, but probably it is fair to assume that over time, we would expect deposit betas to trend below 40% again.
Thank you.
Thank you.
Thank you. Once again, if you wish to ask a question, please press star one, one on your telephone. We will take our next question. Your next question comes from the line of Jovan Sikimic from ODDO BHF. Please go ahead. Your line is open.
Yes, thanks a lot. Good morning. I have just short one on organic growth. If you could provide a kind of geographical split or breakdown. Now you have sizable operations in Netherlands, and you added operations in Germany, and you have anyway strong business in Austria. How geographically retail and corporate lending are performing? If you can add some colors on that, please. Thank you.
Yeah. Thanks, Jovan. We do not break out by individual countries, the volumes. But I can give you just some color as to what we are seeing in general and where there are pockets of strength and probably where areas are more muted. So consumer and SME, which has probably been the strongest, we have seen good opportunity there. We have seen credit cards, obviously is performing ahead of plan. We do some embedded finance there as well in Germany, which is going really well. Mortgages is incredibly muted. In Germany, we are seeing a pickup in mortgages in the Netherlands. The same for Austria, but it has been muted to date. I think maybe we are potentially at an inflection point. Consumer loans are going well. Specialty finance, that is kind of traditionally been steady over the past quarters, if not years.
And that is kind of the retail and SME space. We started in Ireland recently, but that is pretty much Greenfield. Then the corporates, I think where you see the most volatility, the corporate real estate public sector. Public sector is well in the DACH/NL region, in particular, obviously, Austria being the anchor. The corporates has been more volatile in the sense that we have seen more redemptions and the opportunities, as I have mentioned before. It just seems like it is a really frothy market. Real estate, I think there were some idiosyncrasies in the second quarter. In particular, you had two big developments. We had early redemptions. In Q2 in the U.S., some which were more than welcome. We also had the impact of euro dollar FX, which was probably half of the reduction in the real estate. That is just an FX impact.
We have, that was something that we were aware of. We do have a good pipeline, but a deal is not funded till it is funded. I think we have had a good pipeline for some time. Markets are choppy, and we will be patient. That is kind of a tour of the different asset classes across the different geographies. I hope that helps.
No, sure. Thanks a lot. Thank you.
Thanks, Jovan.
There seems to be no further apologies. A further question has just come through. One moment. You have a follow-up question from the line of Borja Ramirez from Citi. Please go ahead. Your line is open.
Hello. Thank you. I have a follow-up question, if I may, on the deposits. I would like to ask if you could give an overview on the deposit trend by weekends being the quarter. Also, a link to this, given your very comfortable liquidity position, I think that that gives you an advantage in terms of repricing the deposit going forward. Thank you.
Borja, we do not provide split by regions. Deposits, but it's been a very similar trend that we see across Austria, Germany, Netherlands in terms of overall customer deposits. Yes, we have a quite comfortable liquidity position, so also we are quite comfortable to reprice the deposits in line with the market.
Thank you.
Thank you.
Thank you. There are no further questions. I would like to hand back for closing remarks.
Thank you, operator. Thanks, everyone, for joining the call this morning. I hope everybody has a lovely summer and gets a chance to get some rest and relaxation. Take care, and we'll talk to you guys in the third quarter. Bye.
This concludes today's conference call. Thank you for participating. You may now disconnect.