Good day. Thank you for standing by. Welcome to the BAWAG Group Q2 2023 results call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll 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 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, and there will be a transcript published on our website after the call. I would now like to turn the conference over to your speaker today, Anas Abuzaakouk, CEO. Please go ahead, sir.
Thank you, operator. Good morning, everyone. I hope everyone is keeping well. I'm joined this morning by Enver, our CFO. Let's start with a summary of the second quarter results on slide 3. We delivered a very strong set of results, with net profit of EUR 181 million, earnings per share of EUR 2.19, and a return on tangible common equity of 26%. The first half return on tangible common equity was 23%. The operating performance of our business was very strong, with pre-provision profits of EUR 262 million and a cost-income ratio of 31.5%. Total risk costs were EUR 20 million, translating into a risk cost ratio of 19 basis points.
We did not release any credit reserves with an ECL management overlay of EUR 100 million that was built up over the past few years and equal to a full year of risk costs. Credit performance remained solid across all businesses, with a low NPL ratio of 90 basis points. We look forward to publishing the results of the EBA stress test on July 28, which will provide greater insights into asset quality, capital, and overall balance sheet resilience. In terms of balance sheet and capital, customer loans were down 3% quarter-over-quarter, and customer deposits were up 1% quarter-over-quarter. Customer funding, which is made up of customer deposits and AAA-rated mortgage and public sector-covered bonds, was up 3% quarter-over-quarter.
We generated approximately 90 basis points of gross capital from earnings and landed at a CET1 ratio of 14.8%, net of the first half dividend accrual. After deducting the proposed EUR 175 million share buyback, our CET1 ratio would be 13.9%. We have a fortress balance sheet with excess capital, post a EUR 175 million share buyback of EUR 330 million, ample liquidity with cash of approximately EUR 11 billion, equal to almost 20% of our balance sheet, an LCR of 207% after having paid back EUR 2.8 billion of TLTRO during the second quarter, and one of the lowest NPL ratios across European banks of 90 basis points, reflecting the strong asset quality.
This will allow us to eventually play offense as we stay patient and liquid in the current market environment. With our strong operating performance during the first half of the year, and despite an overall cautious consumer and muted loan growth, we are updating our full-year targets for 2023. We are now targeting a profit before tax of greater than EUR 875 million, earnings per share of greater than EUR 8.20, and a dividend per share of greater than EUR 4.50. We have a resilient franchise across all cycles with very strong earnings, strong capital generation, conservative and disciplined underwriting, and a granular retail deposit and robust covered bond franchise that is the foundation of our funding. These factors will allow us to consistently deliver quality results.
We continue to remain vigilant in managing risk, requiring us to be patient, always focused on risk-adjusted returns, and not be distracted by irrational lending or short-termism. We focus on the things that we can control: our investments, our risk appetite, the operations of the bank, and being good stewards of capital. After the EUR 175 million share buyback program, which will take a few months, we plan to address further capital distributions around year-end results based on M&A prospects, market developments, and subject to regulatory approvals. Moving to slide 4. We delivered net profit of EUR 181 million, up 35% versus prior year. Overall, strong operating performance with operating income of EUR 383 million and total expenses of EUR 121 million, up 16% and 2% respectively, versus prior year.
Total pre-provision profits were EUR 262 million, up 23% versus prior year. Risk costs were EUR 20 million, down 32% versus prior year. Tangible book value per share was EUR 34.36, up 8% versus prior year and 2% versus prior quarter. This reflects the deduction of the first half dividend accrual of EUR 176 million. Moving to slide 5. At the end of the second quarter, our CET1 ratio was 14.8%, up 70 basis points quarter-over-quarter, after deducting the second quarter dividend accrual. For the quarter, we generated approximately 90 basis points of gross capital from earnings.
Net of our proposed EUR 175 million buyback, our CET1 ratio would be 13.9%, which represents EUR 330 million of excess capital above our stated target of 12.25%. We are well positioned to address multiple market opportunities given our earnings, capital, and funding base. The acquisition of Peak Bancorp in the United States is still pending regulatory approval. However, we have been pleased with the business performance despite the challenges experienced across US regional banks the past few months.
On slide 6, our retail and SME business delivered net profit of EUR 134 million, up 25% versus the prior year, generating a very strong Return on tangible common equity of 38% and a cost-income ratio of 31%. Total assets for the quarter were EUR 22 billion, down 1% versus prior year and down 1% versus prior quarter. Customer deposits were EUR 27.3 billion, down 3% versus prior year and up 1% versus prior quarter. Total retail customer funding, which is a combination of customer deposits and triple A-rated Austrian mortgage-covered bonds, were EUR 37 billion, up 9% versus prior year and up 3% versus prior quarter. Pre-provision profits were EUR 198 million, up 17% compared to the prior year, with operating income up 12% and operating expenses up 2%.
Risk costs were EUR 20 million, reflecting normalized risk costs with no management overlay build or releases. The trend in asset quality remains strong across our customer base, with a low NPL ratio of 1.7% and a risk cost ratio of 36 basis points. We expect continued earnings growth across the retail and SME franchise in 2023, driven by strong operating performance, but muted customer loan growth, given the overall economic environment and overall cautious consumer sentiment. On to slide 7, our corporate real estate and public sector business delivered net profit of EUR 50 million, up 19% versus the prior year, and generating a very strong return on tangible common equity of 26% and a cost-income ratio of 23%. Total assets for the quarter were EUR 13.7 billion, down 4% versus prior quarter.
Customer deposits were EUR 5.5 billion, up 2% versus prior quarter. Total customer funding, which is a combination of public sector corporate deposits and AAA-rated Austrian public sector covered bonds, was EUR 7.2 billion, up 1% versus prior quarter. Pre-provision profits were EUR 66 million, down 1% compared to the prior year and up 13% versus prior quarter. Risk costs were effectively zero, with no management overlay build or releases. The trend in asset quality continues to be solid, with our NPL ratio at 70 basis points. We pride ourselves on disciplined underwriting, focusing on risk-adjusted returns, which factor in losses across all cycles and avoiding blindly chasing volume growth, specifically during the benign credit cycle over the past few years.
We will continue to be disciplined and have the capital and liquidity to support our customers and capitalize on dislocations should they arise, as we see a potential repricing of credit risk more broadly across various asset classes. On slide 8, an update on the real estate portfolio. We experienced a 6% reduction quarter-over-quarter in our real estate portfolio. The portfolio continues to perform well, reflecting the underlying exposure to residential, logistics, and un- and industrial assets, which make up 65% of the total portfolio and 72% of our U.S. exposure. Our office exposure in the United States stands at EUR 470 million, down 4% quarter-over-quarter. This represents less than 1% of total assets, 1.3% of total customer loans, and 9% of our total real estate exposure.
We are confident that we will be able to address any potential issues in the total real estate portfolio and believe the stress test results with a cumulative loss rate under 2% over a three-year period, is a good proxy for stress loss assumptions across the portfolio, which is less than the EUR 100 million management overlay. More than ever, the stress we are seeing in certain asset classes, commercial real estate being one, will differentiate banks in terms of underwriting and asset quality. With that, I'll hand it over to Enver.
Thank you, Anas. I will continue on slide 10. A very strong quarter with core revenues up 6% versus prior quarter, with continued strength in net interest income up 7% and better net commission income. Compared to prior year's first quarter, core revenues were up 18%. The strong core revenues and largely stable operating expenses, our cost-income ratio further came down and stands at 31.5% for the quarter. Risk costs of EUR 20 million are in line with prior quarter, with a risk cost ratio of 19 basis points, which is very comparable to the underlying trend over the last couple of quarters. That is without any releases of our management overlay that still stands at EUR 100 million. We had a reversal of regulatory charges of almost EUR 3 million, which was a result of more than expected Resolution Fund contributions.
On slide 11, we show key developments of our balance sheet. In terms of our balance sheet and capital, customer loans were down 3% quarter-over-quarter and down 8% year-over-year. We continued to improve our customer funding through high customer deposits that were up 1% quarter-over-quarter and further issuances of covered bonds of around EUR 1 billion in the second quarter. Our position of cash and cash equivalents stands at EUR 11 billion, or 20% of our total balance sheet. This is after we repaid another EUR 2.8 billion of TLTRO in the second quarter, leaving a small tranche of EUR 0.6 billion that will be redeemed next year.
We generated approximately 90 basis points of gross capital from earnings and another 30 basis points from lower risk-weighted assets, which were down 3% versus prior quarter, in line with the overall loan and asset development. CET1 ratio came in at 14.8%, net of the first half dividend accrual. After deducting the planned EUR 175 million share buyback, our CET1 ratio would be 13.9%, leaving us with an excess capital of EUR 330 million. On slide 12, our customer funding, which is made up of customer deposits and triple A-rated mortgage and public sector covered bonds, and represents around 94% of our total funding. The split between customer deposits and covered bonds is about 75%, 25%.
On the deposit side, we have EUR 27 billion of very granular retail and SME deposits with an average size of EUR 12,000, and 80% are insured by Deposit Guarantee Schemes. EUR 6 billion of public sector and corporate deposits are largely with long-term relationship customers and mostly from transactional current accounts. In terms of deposit betas, year-to-date trends are in line with our expectations, and our overall deposit beta was around 15% in the second quarter. Based on current rate forwards, we expect deposit betas to grow to below 40% by 2024. Prior to the sudden rise in interest rates the past year, we lived in a period where banks were in search of yield. This was a period that combined excess liquidity with negative interest rates and extremely tight credit spreads.
We consciously made the decision to sit on the sidelines, have our securities portfolio run off, de-risk where it made sense, and make very few investments, given we did not see attractive risk-adjusted returns. We issued almost EUR 10 billion of covered bonds, taking advantage of securing long-term funding at very attractive pricing. This decision to go long liabilities was to match fund our longer duration mortgage portfolio, while also locking in long-term funding during a period of excess liquidity that presented both very attractive pricing and duration. Again, our cash and cash equivalent position, which includes money held with central banks, was EUR 10.8 billion at the end of the second quarter, with an LCR at 207%. This represents around 20% of our balance sheet.
We have purposely maintained an excess liquidity position to address potential market opportunities over the years, which have yet to materialize. Year to date, we have repaid EUR 5.8 billion of TLTRO funds, with EUR 600 million remaining. Moving on to Slide 13, core revenues. Strong net interest income trend continues in the second quarter, up 7% versus Q1, despite lower custom loans. Net interest margin of 291 basis points for the quarter improved by almost 20 basis points. In terms of net commission income, overall stable, with better performance in payments due to seasonal effects and slightly lower advisor business.
For 2023, we expect core revenues to grow by more than 14%, mainly driven by an increase of net interest income to over EUR 1.2 billion, while we assume custom loans to be static to declining for the rest of the year. Slide 14. Operating expenses were up 1% in the quarter as a result of the new Austrian banking collective bargaining agreement. With strong operating leverage, revenues were up 7%. Our cost-income ratio continued to improve and stands at 31.5% for the quarter, which is well on track to meet our 2023 target of below 34%. We'll continue to focus on absolute cost targets. We are confident to manage operating expenses at +2% year-over-year. Slide 15, risk costs.
Overall, stable underlying trends and strong asset quality with a continued low NPL ratio of 0.9%. The risk cost run rate stands at EUR 20 million for the quarter, which is in line with the underlying trend of the past couple of quarters, and with the risk cost ratio of 19 basis points, also on track with our full year outlook of being between 20 and 25 basis points. We did not release any credit reserves with an ECL management overlay of EUR 100 million that we have built over the past few years. Slide 16, we wanted to reiterate and update our 2023 targets.
With our strong operating performance during the first half of the year, and with better line of sight of core revenue trends, we are now targeting core revenue growth of greater than 14%, with a net interest income of over EUR 1.2 billion, while containing operating expenses to 2% growth. Based on stable and underlying trends and solid asset quality, the underlying risk cost ratio ex- is expected to be between 20 and 25 base points. The strong operating leverage, we have also updated our profit before tax target to greater than EUR 875 million, earnings per share of greater than EUR 8.20, and the dividend per share of greater than EUR 4.50, which considers our planned buyback of EUR 175 million in 2023.
Our medium-term targets of a return on tangible common equity greater than 20% and the cost-income ratio under 34% remain unchanged. With that, I'll hand back over to Anas.
Thank you, Enver. We wanted to provide everyone with a recap of BAWAG Group's franchise. We felt it important to re-communicate to our stakeholders who we are, what we stand for, and highlight the franchise growth over the past decade. The past decade is important, as the strategic transformation of BAWAG Group was launched in 2012, which was led by the current senior leadership team. The transformation not only changed the fortunes of the bank at the time, but positioned BAWAG as one of the most profitable and successful European banks in the years that followed, and for many more years to come. As part of our transformation, we embraced our long and rich tradition of representing the workers' bank that serves all communities, from union workers to pensioners, to immigrant communities. A rich history and tradition that dates back over 100 years.
We aim to provide our customers with simple, transparent, and affordable financial products and services they need and that promote their financial health. This underpins our strategy, our growth, and the investments we've made over the past decade. On Slide 18, an overview of the franchise. BAWAG Group is a multi-channel and multi-brand commercial bank with a strong focus on retail banking. We serve 2.1 million customers with Austria as our foundation. We offer basic banking products that our customers need, from current accounts, payments, savings products, term loans and working capital facilities, leasing and factoring products, as well as distributing third-party insurance and investment products through our various channels. Approximately 80% of our customer franchise is retail and SME-focused, with approximately 75% of our customer business in Austria, Germany, Switzerland, and the Netherlands. Our strategy has been consistent throughout the past decade.
We focus on growing our franchise in core markets by serving the basic financial needs of our customers. We differentiate ourselves through efficiency, technology, simplicity, and operational excellence. We operate a safe and secure business, maintaining a fortress balance sheet with strong asset quality and a robust funding stack. Our aim is to extend credit to customers while never overextending their ability to repay. On slide 19, the consistently strong performance of our business the past decade speaks to the quality of the franchise. We have grown pre-tax profits in every year since 2013, with the exception of 2020, when we booked significant management overlay provisions to address potential headwinds brought on by the COVID pandemic, of which we continue to hold EUR 100 million on the balance sheet as a precautionary measure.
We delivered an average return on tangible common equity of approximately 15% over the past decade, despite operating in a negative interest rate environment for almost eight years. Our strategic transformation was the catalyst for sustainable growth and value generation for all our stakeholders. Our focus has been on developed and mature markets. Austria is our foundation, and we find the markets that resemble Austria are most westward, providing geopolitical stability, strong legal systems, and solid macroeconomic fundamentals. We focus on our core businesses and products that meet the needs of our customers. We believe in making long-term investments and not shying away from making tough business decisions. This, at times, may not be popular when right-sizing the business, exiting non-core businesses or loss-making partnerships. We believe in simplicity and transparency, prioritizing what really matters.
We are disciplined and conservative lenders, never compromising our credit quality or blindly chasing volume growth. We are focused on disciplined, long-term, sustainable, and profitable growth, which we assess not after one quarter or one year, but over the long term to understand the underlying trends and impact of our actions and investments. Slide 20, the importance of maintaining a profitable franchise. First and foremost, our profitability allows us to maintain a healthy capital position and capital buffers, which is the bedrock of any bank. Our profitability and capital generation have also enabled us to make significant investments for the benefit of all stakeholders, building a franchise that is positioned for success for many years to come. Over the past decade, we averaged annual gross capital generation of 210 basis points.
Because of this solid capital position and robust capital generation, we have been able to extend EUR 68 billion of credit to our customers over the past decade, growing our customer loans and franchise by 62%, invest approximately EUR 600 million in our technology platforms and branches, and distribute over EUR 2 billion of capital to shareholders since our IPO. This was only possible because we fundamentally transformed the earnings power and capital generation of the franchise. On slide 21, since our IPO in October 2017, our absolute total shareholder return was 17%. Relative to the two largest and most representative European bank indices, we have outperformed the seventy and the seventy by 6 points and 10 points, respectively. We pride ourselves on being good stewards of capital.
Since the IPO in 2017, we have extended EUR 42 billion of credit to our customers, meeting their daily needs and growing our franchise. We have self-funded seven acquisitions, and we have distributed over EUR 2 billion since our IPO in the form of dividends and share buybacks, with cumulative dividends of EUR 14.70 per share. We have a pending EUR 175 million share buyback and are targeting dividends over EUR 4.50 per share for 2023, which represent at least a further EUR 530 million in distributions and would take our total capital distributions, both paid and earmarked, to approximately EUR 2.6 billion by the end of the year since our IPO.
We have also worked hard over the years to build a strong core shareholder base and have always welcomed constructive dialogue with existing and potential long-term investors. The senior leadership team, both as fiduciaries as well as significant shareholders with a 4% shareholding in the bank, are focused on delivering results for all stakeholders every day. The team's ownership reflects the deep commitment and investment in the long-term success of the franchise. On slide 22, our strategy has been consistent throughout the past decade. Our three strategic pillars have guided our transformation over the past decade, and we will guide us over the coming years. Our primary focus has and will always be on execution and doing our best to consistently deliver results for all stakeholders.
We do not have a separate ESG strategy, as ESG underpins our strategic pillars and is embedded in how we run the bank to ensure responsible, sustainable, and profitable growth through robust governance structures. Slide 23. The growth of the franchise, both in Austria and across all markets, has underpinned our success. Our profitability has allowed us to pursue a dual growth strategy, both domestically in Austria, as well as expanding our footprint into six new markets since 2013. This was a mix of organic and M&A growth, all self-funded and all adhering to the fundamental principle of pursuing disciplined, long-term, sustainable, and profitable growth. Over the last decade, we increased customer loans, customer deposits, retail assets under management, and our core product offering.... Most importantly, we have grown our foundation in Austria.
We typically do not use product market share as a specific target in any given year because we believe this at times drives the wrong behavior. However, over a longer period, this provides insights into the trajectory of a business, the impact of long-term investments, capital allocation, and the underlying health of the franchise. Over the past decade, we have increased our housing loan market share from 2.8% to 5.6%, up 2.8 points, as we focused our franchise on more secured lending, serving the housing needs of our customers, and deepening our customer relationships through a greater focus on advisory.
We have also grown our share of consumer loans from 8.2% to 12.7%, up 4.5 points, reflecting our focus on local community banking and the success of initiatives around direct banking, which is more prominent with personal loans. We have substantially grown our share of credit cards transactional volume from 8% to 21%, up 13 points, benefiting from our bolt-on acquisition of Paylife credit cards. We have expanded our market share in auto leasing from 4.5% to almost 8.4%, up 3.9 points, building up our network of local dealers, digital capabilities, and bolt-on acquisitions. Our share of retail household deposits has held steady between 8%-9% over the past decade.
This considers several moving parts from a prolonged period of negative interest rates, shifting customers to current accounts with greater banking features, looking to deepen relationship with customers through investment products, and more recently, focusing on primary banking relationships versus maintaining the last marginal deposit. On slide 24, in addition to growing our market shares in Austria, we have gradually transformed the bank to more of a retail orientation. In 2013, our retail lending accounted for 41% of customer loans. Today, this accounts for 62%, and we will continue to grow through our multi-brand and multi-channel retail and SME business in Austria and abroad. This was only possible through a combination of organic growth initiatives in M&A, filling out our core product offering with factoring, leasing, credit cards, and building society products.
We grew our retail and SME customer loans from EUR 9 billion to EUR 22 billion, up 135% since 2013. Over the same period, we have held our corporates, real estate, and public sector business relatively flat at EUR 13.7 billion, albeit with a greater shift towards secured real estate lending. As part of the strategic transformation of the franchise, we shifted the focus towards secured and public sector lending, which accounts for 77% of total lending, up 12 points since 2013. On slide 25, over the last decade, we have invested significantly and consistently in transforming the franchise. We transformed the bank from a traditional savings bank focused on transactions to a more customer advisory-oriented retail bank. We digitized and modernized our products, customer journeys, and how we work as a team using technology and collaboration tools.
We simplified our workflows, redesigned processes, and streamlined decision-making. We divested from non-core businesses and products as well as loss-making partnerships. The impacts of our investments have been significant. We fundamentally bent the cost curve, reducing our cost-income ratio by over 50% from a starting point of 68% to under 34%. This was only possible because of the long-term investments that yielded real productivity gains and permanent cost out. More than anything else, this has provided us with the sustainable profitability to support our customers, grow the franchise, and continue making long-term investments. A few examples of the specific actions taken and the resulting impacts are the following: We invested approximately EUR 600 million, allowing us to upgrade our self-service, e-banking, mobile banking, and modernize the original BAWAG branch network, providing more capacity for customer advisory.
We digitized approximately 90% of our core products, reducing friction in our sales process and allowing us to scale transactional banking. We completed 9 migrations and consolidated 80% of our data centers. We reduced the number of headquarter sites from 4 to 1. We have invested heavily in training our technology team in cloud fundamentals, effectively insourcing our technology capabilities. Today, we spend approximately 26% of our operating expenses on technology, up from 13% a decade ago, to provide our customers with simple, transparent, and easy-to-use financial products and services across multiple channels and brands. We also discontinued the Austrian Post partnership, saving EUR 50 million annually, exiting 400 post offices, taking full control of our branch network and sales advisors, and most importantly, allowing us to accelerate to a more advisory-focused retail banking business.
We also made strategic decisions to divest from non-core businesses and participations that were weighing down the franchise in terms of both cost and capital. We simplified our group structure, reducing unnecessary management layers, hierarchy, and bureaucracy. On slide 26, a bank is in the business of managing risk. The entire management team prides itself on risk management. Our discipline and conservatism is best reflected in one of the lowest NPL ratios across Europe at 90 basis points. Low balance sheet leverage of 13-15 times based on total assets to equity without adjusting for our excess cash position and low risk costs, with an annual average risk cost ratio over the past decade of 23 basis points. The principles, many of which I have touched upon, basically come down to focusing on mature, developed markets with strong macroeconomics, healthy fiscal positions, and robust legal systems.
We aim to focus on senior secured lending with solid collateral... being a credit spread lender, hedging interest rate risk, and maintaining a securities portfolio comprised of 100% investment grade credit. The business that we do not offer is just as important and reflective of our risk management principles. We do not operate in the CEE, Russia, Ukraine, or emerging markets, as we believe these are at times more volatile markets with less robust legal systems and fiscal capabilities. We do not offer customer derivatives, no mezzanine financing, no capital markets business, no trading book, no exposure to high-risk AML countries, no market risk RWAs, and very limited exposure to high-emitting greenhouse gas sectors. Slide 27. We are primarily customer deposit funded.
90% of our deposits are from Austria, with 80% of our deposits being granular retail deposits across our customer base, with an average size of EUR 12,000 and 80% being insured. Just as important, we do not have any brokered deposits. EUR 6 billion of public sector and corporate deposits are largely with long-term relationship customers and mostly from transactional current accounts. Over the last decade, our customer deposits have been growing in the Austrian market, and our deposit base moved in line with the overall market, maintaining a retail deposit market share of 8%-9%. After years of low to negative rates, we have seen a shift of customer deposits from term to overnight. To address that development of shortening deposit duration, we decided to increase our covered bond funding over the last couple of years.
We issued over EUR 10 billion of covered bonds since 2019, taking advantage of securing long-term funding at very attractive pricing. This decision to go long liabilities when others went long assets to generate extra yield, is one that we see playing out across banks and will have significant impact on any given bank's profitability. Our motivation was to match fund our longer duration mortgage portfolio while also locking in long-term funding during a period of excess liquidity that presented both very attractive pricing and duration. Our covered bonds have a weighted average life of 9 years, with almost no maturities until 2027. This provides us today with a structurally more balanced customer funding stack, nicely matches our mortgage loan book with a weighted average life of approximately 8 years.
Our decision to go long liabilities is also reflected in our cash and position, which includes money held with central banks, which is around EUR 11 billion, or 20% of our balance sheet, at the end of the 2Q, with an LCR of 207% after redeeming EUR 5.8 billion of TLTRO over the last couple of months. This underpins our highly liquid balance sheet and our robust customer funding stack. On slide 28, over the past decade, we have made significant strides in delivering value for all our stakeholders. A few examples are the following: On the customer front, we saw the long-term trends in retail banking and proactively transformed our retail business to be focused more on advisory as a trend, as transactional banking was slowly being displaced by digital capabilities.
Our profitability allowed us to extend EUR 68 billion of credit over the past decade. We are also cognizant never to pass on negative rates to customers and work closely to support our customers during the pandemic to ensure we provided financial relief and support. On the investor front, we took the company public in 2017, representing the largest IPO in Austria's history and ensuring we listed in our home market. Since our IPO, we have delivered a total shareholder return of 17%, outperforming the relevant bank indices and distributing, earmarking almost EUR 2.6 billion of capital by the end of 2023. On the employee front, we have firmly established the company's culture as one defined by meritocracy, accountability, fairness, diversity, and promoting the well-being of our employees through various training and benefits programs.
We were one of the first companies to embrace a hybrid home office model, providing our employees with the flexibility to strike a balance between the demanding work schedule and family and personal needs. In terms of society, we have focused our resources in promoting social programs focused on supporting underserved communities. Having mentioned the above, we still have a lot more to do. Being cognizant of gathering the voice of our customers, our employees, our investors, and broader society, we plan to engage more broadly and meaningfully to capture the voice of all our different stakeholders in the spirit of continuous improvement. We have never taken our stakeholders or the success of the franchise for granted. We will continue executing our strategy, serving our customers, investing in our people and society, and ensuring we stay ahead of the curve in a dynamic and changing banking environment.
Our transformation over the past decade has provided the foundation for sustainable growth and value generation for all stakeholders. With that, operator, we'll open up the call for questions.
Thank you. 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. We will now go to your first question. One moment, please. Your first question comes from the line of Mehmet Sevim from J.P. Morgan. Please go ahead.
Good morning. Thank you very much for the presentation and all the additional disclosures that you provided. I'll have two questions, please. My first one will be on loan volumes, as the momentum here looks relatively weak compared to all the other moving parts in the balance sheet and the PNL. How much of this would you say comes from lower customer demand and maybe higher repayments from customers in the environment of high rates? How much, on the other hand, from your lower appetite to deploy capital in the current market environment? Going forward, how do you see the volumes, particularly, I would say both in the second half, but also beyond that, helping us maybe understand the implications of high for longer rates on the outlook for growth?
My second question on the other side of it, will be deposit behavior, broadly around betas. Thank you for the disclosures here, also deposit mix. What you're seeing here from customers in terms of behavior, maybe is it fair to say that it's so far it's coming a little better than expected? How does your pricing strategy currently in Austria compare to the rest of the market? Thank you very much.
Thank you, Mehmet, very good questions. I'll take the loan, volumes question. Enver, you'll take the deposits. Mehmet, the loan volumes, we mentioned that, customer loans obviously are down quarter-over-quarter and, since, on a year-to-date basis. This is a result of I think two factors: a cautious consumer. obviously, loan volumes across the market are down. I think just the high rising rates, and that impacts the overall consumer sentiment. What has been surprising from our standpoint is, at least when you look at credit spreads, given the velocity of increase in rates, I would have thought that there would be more of a repricing of credit risk and spreads would have widened. It's probably been the opposite. I don't think this is a long-term trend.
I think this is more of an anomaly. What's the exact timing, whether it's 1 quarter, 2 quarters? We're not sure. We think there will be a lot more interesting opportunities, but as we've always said, we don't chase volume growth. It has to meet risk-adjusted returns, and we're going to be disciplined commercial lenders. Even though it's been muted, static kind of volume growth to declining, and I think Enver gave that kind of outlook for the 2nd half of the year, we're in a good place. When the market reprices and when there's actual robust demand, we'll be there to be able to serve our customers and deploy capital and liquidity. You want to take deposits?
Yeah, sure. On the deposit front, Mehmet Sevim, you asked a couple of things. The deposit trends, as we are seeing right now, the market has been quite stable, the overall Austrian market. We've been up in the quarter. Month to date, in July, it's been very stable, and we would expect a very similar trend to continue for the rest of the year, just in terms of kind of deposit volume trends. In terms of the mix of deposits, we have seen early in the year, some shift into term deposits, but that's really happened just in the first quarter. We have not been really seen anything happening in the second quarter.
Right now, the split is probably 90% daily savings, whereas it's 10% term deposits. It really didn't change over the last couple of months. In terms of pricing and betas, I would say we are probably average of the Austrian market, where we price on the different products. Obviously, you have some nuances around, you know, special offers, fresh money, some features of the products. Overall, I would say, we are a good proxy for the average pricing. Which leads me to the betas, which kind of grew from 10% that we have seen into one now to 15%, which is perfectly in line, maybe a bit better than what we expected initially. Still completely in line with our projections to be below 40% till '24.
That's very helpful. Thank you, Enver.
Thanks, Mehmet.
Thank you.
Thank you. We will now go to your next question. One moment, please. Your next question comes from the line of Hugo Cruz, KBW. Please go ahead.
Hi, thank you for the time. I have three questions. First, on CRE, I've noticed that your volumes are down Q1, Q2 for the overall portfolio. They're stable for the U.S. portfolio, so it sounds like you're still doing some business in U.S. If you could talk about a bit more granularly what you're doing with CRE, both, you know, maturities and new business. Second, on your funding slide, where you talk about the average duration of your housing loans of eight years, which I thought is quite interesting, quite short. Is this something you're seeing changing in this rate environment? Are you seeing, you know, are people actually doing less repayments or more repayments over time? The final question on Ireland.
I read in the press that you guys actually entered the market, bought a very small platform there recently. Can you tell us about your plans for this market? Thank you.
Thanks, Hugo. All good questions. Commercial real estate, what we call the real estate lending portfolio, is down 7% quarter-over-quarter. The U.S. exposure is primarily flat. I think the question we get a lot, obviously, is on the U.S. office exposure. That is down 4% quarter-over-quarter, normal amortizations. The reality is the market, we just don't see a lot of opportunities. We've always been cautious on office post-COVID. I kind of gave you just a sense of the overall exposure for U.S. office. Given the current trends, just to give you an environment, there's not a lot of new business. It's more just normal amortizations, a few early redemptions. We'll see. We'll be cautious in terms of how we lend.
We tried to provide a little more disclosure on the real estate portfolio in terms of overall stress scenarios, kind of using the stress test results that hopefully will be published next week, with a cumulative loss rate of under 2% over a three-year period, which the management overlay more than sufficiently covers. We feel pretty good about where the portfolio is today. There's less new business opportunities. I think it kind of goes back to my earlier comment of people are pretty cautious and things are a bit stuck. Look, we look at things on a risk-adjusted return basis, and we'll be disciplined across asset classes. The opportunities we'll probably see are in residential, industrial logistics if they do open up. Enver, you want to take housing loans?
Yeah, sure. On the mortgages, you asked about the short duration of the mortgage loans. I think the main reason for that is almost all our mortgage loans are amortizing loans. We hardly do any interest only of the likes, the bullet loans. That's why, you know, the overall duration is lower than 10 years. In terms of repayments, it's a bit mixed picture. You see more or less. We have been doing mostly fixed rate mortgages over the last couple of years. We don't see any increased repayments, which is kind of, you know, intuitively what you would expect. We see a bit of kind of shift from some of the vintage floating rate mortgages into fixed rate mortgages these days, but nothing meaningful in the terms of overall mix.
I would say it's kind of balanced in terms of repayments.
Lastly, Hugo, the question on Ireland, MoCo is a small platform that we purchased that allows us to have origination capabilities. We like the team. We like kind of the customer journey that was created. More broadly, we like the macro fundamentals of Ireland, mortgages or housing loans as an asset class. We think it's quite robust. There's a acute housing shortage in Ireland. This is not any new news, and we like the risk-adjusted returns profile. Ireland will probably be more akin to the Netherlands when we entered the Netherlands in terms of NHG Dutch mortgages. That will take time. It's something organic, and the platform is effectively a greenfield. Thanks, Hugo.
Thank you very much.
Thank you. We will now go to your next question. One moment, please. Your next question comes to the line of Gabor Kemeny from Autonomous. Please go ahead.
Yes, hi. Thanks for your additional insights on the franchise and your strategy. My question is about customer satisfaction here. Obviously, it's been debated quite a lot in the last few weeks. My question is: How do you measure customer satisfaction? What initiatives do you have in place to improve customer satisfaction? Coming back to financials for a second, I think Enver mentioned that you expect further operating profit growth in retail SME, while even though loan demand is weak and you expect beta to increase. Can you elaborate on what you expect to drive that growth? If it's NII, how do you think about the group's NII dynamics for the rest of the year? Thank you.
Thank you, Gabor. Very good questions. As far as customer satisfaction and what we do internally, obviously we don't present a lot of this stuff externally. We get a voice of the customer. We do it through our local branches. We have almost 70 or so local branches in Austria. Through our branch managers, we do mystery shopping as well. There's a host of things that we do to better understand the customer needs, friction that the customers are experiencing in the process, primarily on OTC or kind of transactional banking. We look to improve that through a variety of measures, through training, through our digital capabilities, through store hours.
I think what we'll do going forward is just be, I think, provide more information, more transparency around how we do those assessments and the results of those assessments as well. That was part of it when I said about the voice of the customer and the voice of stakeholders. Those are things that I think there's an opportunity for continuous improvement. What was the second?
I think the second question, Gabor, was around retail, I think operating profit, if we expect it to continue to grow, and I think the overall NII trend was the second part of the question. Yeah, we would expect retail to further grow because you have some long-term benefits on the deposit side from the, you know, deposit hedge that we put on. That is the main driver. Also, if you look at the assets, they are quite stable in retail, not growing, but at least more stable than we see in the corporates, real estate, and public sector side. Overall, the NII trend, I would say twofold. The one is just deposits, deposit betas, interest rates curve. Still, you would see positive momentum in that.
On the other side, that's why we indicated more stable development for the rest of the year is the asset NII. You know, we have seen assets coming down, and as mentioned, we want to be patient in this market environment. The question will be: How quickly will we see assets growing again? That will drive then the overall NII trend in the other quarters, I would say.
Thank you, team. Just a small follow-up to Anas's point, please. What's your branch strategy from here, just in terms of the size of the network? Do you think what you have now is sufficient? Are you planning to close down more? What's the outlook there?
Gabor, this is, I think, the ideal network size. You can be opportunistic in terms of certain branches and opening up branches in new areas or white spaces, but I would say this is the ideal network, given kind of the current business model.
Very clear. Thank you.
Thank you, Gabor.
Thank you. We will now go to your next question. Your next question comes from the line of Marlene Eibensteiner from Deutsche Bank. Please go ahead.
Yes. Hi, good morning, thank you for taking the questions. I would have two. Firstly, on the updated guidance going forward for 2023, could you please elaborate a bit on the underlying drivers as most line items and expectations of which seem to remain unchanged? Do you expect a higher contribution from fee income going forward? Secondly, could you also please provide an update on potential M&A opportunities that you're seeing in the market currently? Thank you.
Thanks, Marlena. Enver, you want to?
Yeah, I'll take it first. Yeah, I think on the outlook, Marlene, what we said on the call, it's mainly coming from the strong performance of the first half and having better line of sight of the revenue trends of the second half of the year, which is mainly to come from the NII. If you extrapolate just what we have seen in the second quarter, I think we feel very comfortable getting to the 40% plus guidance. NCI, I would say there is still, you know, positive momentum, but kind of stable, very stable development that we have seen in the last couple of quarters. I think we'll continue also for the next quarters.
Marlene Eibensteiner, in terms of the M&A, I mentioned earlier with the full year results, we thought there was going to be things in the first half that's been delayed to the second half. We've seen that reinitiated. I think we'll get a better sense by end of year for the M&A prospects and the things that are tangible and the things that never materialize. That's why, in terms of, you know, capital distributions, incremental to what we've already talked about, we'll have a better sense because we'll then know how the M&A prospects develop, and then just the overall market environment and potential new opportunities. Thank you.
Thank you. We'll now go to your next question. Your next question comes from the line of Tobias Lukesch from Kepler. Please go ahead.
Yes, good morning, thanks for the presentation. My questions are mainly around the targeted bank acquisitions and holdings. First, in terms of the Idaho First Bank acquisition, to what extent have you revised your strategic thinking around the asset following the US regional bank crisis earlier of the year? Secondly, on KUB Holding, any strategic moves regarding this one? You know, there was this big special dividend which you accounted for, or where you adjusted basically only the carrying amount. Would be interesting, you know, like if there is a bit more, you know, of actionable things around that over the next 1-3 years, maybe. Very lastly, did I just, you know, like, understand that correctly around M&A?
There will be an update with Q3 results, or rather, is that rather something we discuss next year, basically, when we have the year-end results ready? Thank you.
Thanks, Tobias. All good questions. M&A, I think it's more realistic by year-end results. I don't foresee anything happening in 3Q. It's just the second half of the year, and I think then, at full year results, we'll be able to more, I think, confidently provide you with where we stand on M&A, if something is tangible or if things don't materialize. That's the broader question. On Idaho First Bank, Peak Bancorp. Look, this is. We get a lot of questions on this. the community bank that we're targeting, which is Idaho First Bank, let me start by saying we've been in close contact with the team.
The operating performance, obviously, in light of the market environment with U.S. regional banks, we're very pleased with the development, both on a deposit as well as the asset quality standpoint. We like that. The process is still pending regulatory approval. We can't talk about the broader, or more details in terms of just the overall acquisition. Hopefully we'll be able to come back shortly and provide more details on that. In terms of just the strategy, it's a growth platform for us. It's retail and SME. It's not commercial real estate. There's certain asset classes that we like, and we think it'll be a new growth platform, similar to the Netherlands, similar to potentially what we're doing in Ireland, that adds to kind of our geographic, revenue and earnings diversity.
That was always the thinking, and we like the overall market in terms of maturity and opportunity. You want to take, KUB?
On KUB, I think 2 things, guys. The first one, special dividend. As you mentioned, rightfully, is we have not taken it to the through the P&L, you don't see any of that in our P&L statement. We have reduced our carrying amounts by the exact amount of the dividend received, which is just being a very, you know, conservative, bounded approach on our side. The second part of the question, it's not a strategic investment that we have. We only have 2.5% invested in KUB.
Thank you.
Thank you.
Thanks, Tobias.
Thank you. We will now go to our next question. Your question comes from the line of Máté Németh from UBS. Please go ahead.
Hi, good morning, thank you for your presentation. I have a couple of questions, please. The first one is on real estate lending. You had 6% decline from the previous quarter in real estate lending. Could you just clarify if this is all organic development, so just amortizations or exposures rolling off? I think you mentioned specifically the U.S. office portfolio that this was the case. Could you just confirm that this is also true for the entire real estate lending book? Also related to that, if I'm not mistaken, the average duration of that real estate lending book is just about 3 years, three and a half years.
Am I wrong to assume that in this environment, and just referring back to you, to your comments, you know, saying you don't see such attractive opportunities, so am I correct assuming that in this environment, and we could see continued decline in this book, you know, at this perhaps similar pace that we saw in the second quarter? Finally, a question on risk weights in the real estate lending book. Could you tell us what the average risk rate is, and in that part of the book, it's clearly higher than the 51% you have in the overall corporate, real estate, and public sector division.
If that's the case, is it fair to expect a more pronounced RWA decline going forward, even relative to the total asset decline? Thank you.
Thanks, Mate. Very good questions. In terms of just the amortization, that was normal course amortization. Every now and then, we'll have an early redemption that happened in the first quarter, by the way, where the borrower refinances, which I think is contrary to a lot of the market sentiment. We're cautious, you know, in terms of risk-adjusted returns. We did see some opportunities in real estate lending with resi as an underlying asset class. I think that's still pretty robust. In terms of the US exposure, we don't really see much across industrial and logistics. Things are pretty frozen. You know, these are typically 5-year term loans that cash flow pretty quickly. We haven't seen anything in terms of anything unusual in terms of overall amortizations.
Then I gave some guidance in terms of, if you stress the portfolio under adverse scenarios, you know, not using our data points, but just using external data points, and we'll be able to share more of this detail next week as we provide kind of the details of the EBA stress test. I think that'll give people a sense of comfort. Then there were some more questions.
I think you, the duration, 3.5 years.
Yeah, that's about right.
-assumption. You asked about the risk rates. In theory, they're slightly above 60%. 60%-65% on average, we have.
On the RWAs, yeah.
Yeah.
It's a higher than the 50, because obviously that's weighed down by the public sector.
Yeah.
Thanks, Mate.
Thank you.
Thank you. We will now take our last question for today. The question comes from Andrea Vercellona from BNP Paribas. Please go ahead.
Good morning. I've got two. The first one is on deposit hedging that you mentioned before. Can you elaborate a bit on what is the notional of the hedging? What is the expected rollover and expected tailwind to NII coming from this component? The second question is on your strategy for deposit pricing for retail. You're guiding us to stable-to-down volumes in the short term. You don't see majorly attractive investment opportunities on the securities book. Essentially, you don't need an incremental deposit funding, if that is the picture. Do you plan to price in line with the market, or could you even be less aggressive, because you are happy to let some deposit go if they want to? Thank you.
Thank you, Andrea. On the deposit hedging, most of our deposits, as you said, are daily, and we do hedge them. Directionally, I can tell you 40% roughly of them are hedged on a 10-year rolling basis, which gives you an average duration of the hedge of 2 years for the overall hedge portfolio. But it's not point in time, it's a rolling. Every year, you know, one part will roll over. That benefit that you see from the rollover of hedges is actually offsetting right now the increasing betas. It's kind of perfectly matching, and it's in line again with the expected beta to offset itself.
Depending obviously on the rate curve that we will see in one, two years' time, there is still tailwind benefits from that kind of rollover of the hedging, depending on the, on the rate structure then. In terms of deposit pricing, a very good question. I think our strategy is pretty much in line with the market. Said it before, a bit nuanced. There are a few things that we are just not doing. We are not into brokered deposits. We don't think that's high quality. We would not, you know, spend money on that. We do value more primary banking relationship deposits over hot money or marginal deposits. We are a bit more defensive there than the market. Overall, I think it's fair to say that we are pricing in line with the overall market.
Thank you.
Thanks, Andrea.
Thank you. We do have one further question. One moment, please. The question comes from the line of Simon Nellis from Citi. Please go ahead.
Hi. Thanks for the opportunity. Just one last quick one from me. Back in your 2021 Investor Day, you said that around EUR 50 million of annual regulatory charges would run out. I think you've got a EUR 15 million reg charge target in 2025. Can you just give us some guide or look through to next year and 2025 on reg charges and update?
Sure, Simon. Good memory. Regulation, I think for 2024, is to be around EUR 25 million. I think we still have a bit of remainder of the last kind of payment in the Deposit Guarantee Scheme. The contributions to the Resolution Fund are done with this year. Basically this year, I think we'll be around EUR 45 million, next year, EUR 25 million, and then after EUR 25 million, EUR 15 million is the run rate. That's kind of directional what we expect for the coming years.
Super, very helpful. That's it. Thanks.
Thanks, Simon.
Thank you. I will now hand the call back to Anas for closing remarks.
Thank you, operator. Thanks, everybody, for joining the call. I know this was a little longer than usual. I hope everybody has a great summer, and we look to catch up for third quarter results. Take care and have a great day. Bye.
Thank you. This concludes today's conference call. Thanks for participating. You may now disconnect.