Good day, and thank you for standing by. Welcome to the BAWAG Group Full Year 2021 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 on your telephone. Please be advised that today's conference is being recorded and a transcript will be provided on the company's website. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Anas Abuzaakouk. Please go ahead.
Thank you, operator. Good morning, everyone. I hope everyone is keeping well despite the very sad events unfolding before us in the Ukraine. Our thoughts and prayers are with all those who have been impacted, and we pray that the sanctity of life will be preserved in this unjust war and wherever we see an assault on democracy. As usual, I'm joined this morning by Enver Sirucic, our CFO. Let's start with a summary of full year 2021 results on slide three. For the full year 2021, we delivered net profit of EUR 480 million, earnings per share of EUR 5.39, and a return on tangible common equity of 16.1%.
The underlying operating performance of our business was very strong, with pre-provision profits of EUR 743 million, up 14% versus prior year, and a cost-income ratio of 39.5%. Total risk costs were EUR 95 million, translating into a risk cost ratio of 23 basis points with the business on a path to full normalization of risk costs in 2022. The fourth quarter was exceptionally strong, with a net profit of EUR 164 million and a return on tangible common equity of 21.3%, benefiting from a lower tax rate and positive regulatory charges. We delivered on all of our 2021 targets, with a return on tangible common equity exceeding our 15% target and a cost-income ratio below our 40% target.
In terms of customer loan growth and capital, average customer loans were up 4% quarter-over-quarter and 9% for the full year. We ended the year with a CET1 ratio of 15%, generating 230 basis points of gross capital and up 100 basis points from year-end 2020 after deducting the 2021 dividend. We will be proposing a dividend of EUR 3 per share or EUR 267 million to the AGM on March 28. We have filed the share buyback application for an amount up to EUR 425 million in tandem with our year-end results, which we plan to execute in 2022, subject to regulatory approvals. After deducting a buyback in the amount of EUR 425 million, our CET1 ratio for year-end would be 12.85%.
Additionally, we will be increasing our dividend payout ratio this year to 55% of net profit. With the strong business momentum coming out of the fourth quarter of 2021, our targets for 2022 are the following, a profit before tax over EUR 675 million, return on tangible common equity greater than 17% and a cost income ratio under 38%. We recently held our Investor Day in September of 2021, where we shared our plans and targets through 2025. We updated our return targets to return on tangible common equity over 17% and a cost income ratio under 38%, which represent the normalized return targets for our business going forward.
Our 2025 financial targets aim for a profit before tax of over EUR 750 million, earnings per share of over EUR 7.25, and a dividend per share of over EUR 4. Based on our performance in 2022, we will revisit our 2025 targets given a number of potential opportunities that could materialize this year. We also committed to a set of ESG targets for the first time by 2025. We launched several initiatives last year and have a roadmap to achieving and hopefully exceeding our specific 2025 targets. The past two years have been incredibly challenging and not without adversity, testing our collective patience and resolve. However, the pandemic highlighted the quality, resilience, and sustainability of our franchise. As we emerge from the pandemic, we recognize that we need to be even more vigilant in addressing the intensifying geopolitical climate and health risks.
We believe the current geopolitical situation and significant inflationary headwinds will cause real disruptions to businesses this year and in the years ahead. Following the pandemic, this will be yet another litmus test around franchise resilience, quality of operations, and cost management. The resilience of our franchise lies in our ability to deliver for our stakeholders across all cycles. Moving to slide three, a recap of our full year results. Again, we delivered a full year net profit of EUR 480 million and an EPS of EUR 5.39, both up 68% versus prior year, and a return on tangible common equity of 16.1%. Overall, very strong operating performance across the board, with operating income up 5% and operating expenses down 7% versus prior year.
Risk costs were EUR 95 million, down 58% versus prior year and reflecting the normalization of risk costs. Tangible book value per share was EUR 34.90, up 7% versus prior year and up 1% versus prior quarter. This considers the full year 2021 dividend accrual of EUR 267 million and a payment of EUR 420 million earmarked dividends from 2019 and 2020 that was made during the fourth quarter. On slide four, our performance over the last three years in a pre- and post-COVID environment. Two years removed from the onset of the pandemic, we wanted to highlight the resilience of our franchise.
When comparing 2019- 2021 results in a pre- and post-COVID environment, we grew absolute core revenues by approximately 5% and reduced operating expenses by over 8%, resulting in pre-provision profit growth of approximately 5%. In 2021, we delivered an ROTCE of 16.1% and a cost-income ratio of 39.5%, in line or better than 2019 returns. We generated 230 basis points of gross capital in both years, improving our already strong capital position even further.
Maintained as-solid asset quality with an NPL ratio of 1.4%, fortified our balance sheet even further, increasing our reserve ratio by 40 basis points to 1.3%, and delivered on our commitments to shareholders in terms of capital distributions while at the same time meeting the requests of our regulator. Most importantly, we grew our earnings and dividend per share by 15% and 16% respectively. Our highly efficient banking platform, with the cost income ratio under 40% generating high mid-teen returns and high levels of pre-provision profits, pre and post COVID, gives us the flexibility to proactively and prudently address various risks that may arise.
Despite the many challenges we faced over the past two years, and will surely face in the future with the rising geopolitical, climate, and health risks, we believe this was a true litmus test of the quality of the franchise. We have emerged stronger, more focused, more determined, and are excited to address the many opportunities ahead of us. Our transformation over the past decade has been a response to changing customer behaviors, the changing expectations of our stakeholders, and meeting the challenges of the future. Onto slide five, our capital development and distribution plans. At year-end 2021, our CET1 ratio was 15%. We generated 230 basis points of gross capital as we continued to consistently generate significant amounts of capital, averaging 215 basis points annual gross capital generation over the past three years, despite the volatility brought on by the pandemic.
As of year-end 2021, and after deducting the full year dividend accrual of EUR 267 million or EUR 3 per share, we have excess capital of EUR 545 million versus our target CET1 ratio of 12.25%, which we are keeping constant despite a reduced P2G to 75 basis points and a constant P2R of 2%. Following our capital distribution framework, to the extent that we are unable to deploy our excess capital in organic growth or M&A, we will distribute capital to shareholders through share buybacks and/or special dividends on an annual basis in a normalized environment as part of our ordinary capital distribution plans. Therefore, we are targeting a share buyback in 2022 in an amount up to EUR 425 million subject to regulatory approvals.
Net of a potential EUR 425 million buyback, our CET1 ratio would be 12.85% or a 60 basis points buffer above our stated target of 12.25% and 371 basis points above our SREP capital requirement of nine point one four percent. Moving to slide six. Our Retail & SME business delivered full year net profit of EUR 363 million, up 29% versus the prior year and generating a very strong return on tangible common equity of 27% and a cost income ratio of 38%. Average assets for the year were EUR 20.3 billion, up 9% versus prior year and 2% versus prior quarter, driven by housing and consumer loans.
Average customer deposits were EUR 26.8 billion, up 8% versus prior year and 3% versus prior quarter. Full year pre-provision profits were EUR 565 million, up 6% compared to the prior year, with operating income up 3% as we begin to see a gradual normalization of customer activity. Operating expenses were down 3% versus prior year, resulting from several operational initiatives and the continued focus on driving synergies across the franchise. Risk costs were EUR 60 million, down 52% versus prior year, reflecting a normalization of risk costs without any release of reserves. We executed on various operational and strategic initiatives last year and will continue to do so in 2022. We expect continued earnings growth across the Retail & SME franchise in 2022, driven by strong operating performance across the board. On to slide seven.
Our Corporates, Real Estate, and Public Sector business delivered full year net profit of EUR 153 million, up 90% versus prior year and generating a strong return on tangible common equity of 16.5% and a cost income ratio of approximately 22%. Average assets for the year were EUR 14.1 billion, up 2% versus prior year and 7% versus prior quarter, driven primarily by real estate and public sector lending. Pre-provision profits were EUR 243 million, up 24% compared to the prior year. Risk costs were EUR 29 million, down 64% compared to prior year, reflecting a normalization of risk costs and customer activity. We continue to see solid and diversified lending opportunities and a normalization of customer activity with a good pipeline of commitments in the first quarter.
We will continue to maintain our disciplined underwriting, focus on risk-adjusted returns, and avoid blindly chasing volume growth. On slide eight, a recap of how we've executed our strategy in 2021. Over the past decade, we've grown our business from a domestic Austrian bank to creating a DACH/NL regional business which represents Germany, Austria, Switzerland, and the Netherlands, to expanding to Western Europe and the United States. The common denominator of our core markets is stable and developed countries. The diversity of our people and business is and will always be a core strength of the group. In 2021, we grew average customer loans by 9%. More importantly, we invested in several new channels and markets that will serve as future growth drivers in the years ahead as we build a banking platform for the future.
In terms of M&A, we closed on two deals in the fourth quarter of 2021. We acquired Hello bank! Austria, an online brokerage platform that will complement our Austrian Retail & SME franchise. The acquisition will have immediate benefits to the Austrian business while also providing opportunities for future growth in adjacent markets. We also closed on DEPFA Bank, an Irish public sector bank that was placed in wind down a few years back. This transaction was more akin to a runoff portfolio deal, with the team being able to leverage our group operational capabilities to expedite the orderly wind down of the bank without taking any credit risk. We have always been committed to driving efficiency and operational excellence across the group, as this truly is the one thing that we can control and is the bedrock of our "self-help" DNA.
We launched several initiatives over the past two years that have allowed us to counter the significant inflationary pressures we're confronted with today. A few examples of the actions taken were combining our technology and operations group, further optimizing our physical footprint, continuing to invest in our technology and data infrastructure, and streamlining our organizational design. As a result of our transformation over the past decade, as well as having executed on multiple initiatives during the pandemic, we will be in a position this year to more than fully offset record cost inflation. To put this into perspective, if we stood idle, we would have experienced total cost inflation upwards of 5% in 2022 from a baseline of EUR 485 million in 2021.
However, because of the operational initiatives and execution over the past two years, we have a plan to reduce our operating expenses by approximately 2% on a net basis in 2022. I bring this up as an example to demonstrate what differentiates our company, as well as highlighting the risks of inaction and complacency. We are inherently risk-averse and run the bank to ensure we maintain a safe and secure risk profile. We focus on developed and mature countries with solid finances, stable legal systems, transparent markets, and avoid geopolitical hotspots. We do not have any direct exposure to Russia or Ukraine and no relevant exposure to CEE countries, as this has been our strategy over the past decade. We have always maintained a conservative risk appetite and believe that credit markets have been quite frothy over the past few years, requiring us to be patient.
Our guiding lending principle as a bank has always been to focus on risk-adjusted returns and not blindly chasing volume growth. We have a resilient business model across all cycles with consistently strong earnings and capital generation. Our asset quality, funding, and capitalization are all very strong, with an NPL ratio of 1.4%, which is 1% when excluding the City of Linz, EUR 35 billion of customer deposits, and a conservative CET1 target of 12.25%. We continue to focus on secured and public sector lending, which represents approximately 80% of customer assets. We have minimal exposure to the oil and gas industry, with total exposures under 1% of total assets.
Our stress test results from 2021 demonstrated the resilience of our balance sheet with a three-year adverse impact of -198 basis points on our CET1 ratio versus the ECB bank average of -520 basis points. On slide nine, an update on our recently signed U.S. community bank acquisition. We recently signed on the purchase of Peak Bancorp earlier this year, which is the holding company of Idaho First Bank, known as IFB. IFB is a Retail & SME-focused community bank that will provide us with the platform to drive organic growth across Idaho and the broader United States, growing in a core market that is deep, broad, and transparent. The focus will be on raising deposits and providing mortgages, consumer, and small business loans through various channels, be it branches, platforms, or partnerships.
We plan to implement various digital capabilities, allowing us to scale the business by leveraging group-wide operational and technology capabilities. We have over a decade of lending experience in the United States, focused primarily on corporate and real estate lending, and recently opened a U.S. representative office to help maintain and source new business across our customer base. The purchase price of the bank was $65 million, which is still subject to shareholder and regulatory approvals. The acquisition will have approximately a 25-30 basis points impact on our CET1 ratio upon closing, which could take up to 1 year. The plan is for the bank to generate an ROTCE over 17% and contribute over EUR 30 million of pre-tax profit by 2025, which would represent year three of the acquisition.
This will have no impact on our overall group capital distribution plans and will be incremental to our profit before tax target in 2025. We're excited about the combination of community-focused banking augmented with access to new asset origination channels as we continue to build out a scalable and efficient banking platform across the group, providing us with yet another growth channel across one of our core markets. With that, I'll hand over to Enver to go through the financials and outlook in more detail.
Thank you, Anas. I will continue on slide 11. We had a very strong fourth quarter, c ore revenues is up 3%, whereas this third quarter, with a very strong net interest income of 4% and net commission income of 1%. Compared to prior year, core revenues were actually up 6%. On the back of strong core revenues and almost unchanged operating expenses, our cost-income ratio further came down and stands at 38.3% for the quarter. Risk cost of EUR 20 million show more normalized picture with a risk cost ratio of 17 basis points in the fourth quarter, which is in line with our long-term trend, while we maintain the management overlay of more than EUR 60 million. Regulatory charges and the tax line were positively impacted.
Regulatory charges by lower than expected guaranteed deposit balances and recoveries from prior insolvency cases, and the tax line by the positive goodwill impact from the DEPFA acquisition. Slide 12 shows key developments of our balance sheet. In terms of customer loan growth and capital, average customer loans were up 4% quarter-over-quarter and up 9% for the full year, with asset growth across our customer segments. We ended the year with a CET1 ratio of 15%, up 100 basis points from year-end 2020, after deducting the 2021 dividend of EUR 3 per share at EUR 267 million. We also increased our cash position as we believe that being patient at the current interest rate and spread levels will provide an interesting opportunity in the future to deploy our excess cash.
On the funding side, we continued improving our long-term funding profile through issuing EUR 1.5 billion mortgage-covered bonds, including our first green bond in Q3. On slide 13, core revenues, very strong net interest income, up 4% versus Q3, and at the net interest margin of 226 basis points for the quarter, with 227 basis points for the full year, clearly outperforming our outlook for 2021. In terms of net commission income, positive trend continues, up 1% versus an already strong third quarter. Overall, we saw a very consistent trend in 2021, especially with the strong advisor business and improving but still a challenged payments business. Overall, we are back at the pre-pandemic levels.
For 2022, we expect core revenues to grow by more than 4% as we continue to see a positive trend in NII for the coming quarters, which is coming from asset growth and better interest rate environment, not considering any rate hikes in 2022. Just to remind everyone, 100 basis points increase over the three-month Euribor would translate into EUR 100 million of NII per year. With that, moving on to slide 14. We managed to keep operating expenses at a very stable level throughout the year, despite inflationary pressures we are seeing everywhere. This was only possible because we launched several initiatives over the past two years that have allowed us to counter these significant inflationary pressures we are confronted with today.
Cost-income ratio continued to improve and stands at 38.3% for the fourth quarter, or 39.5% for the full year, which is better than what we targeted and well on track to meet our 2022 target of below 38%. We will also continue to focus on an absolute cost out target as we did over the last decade. Despite inflation, we think we can achieve a net cost out of around 2% in 2022. As I mentioned before, this is only possible because of all the initiatives we launched over the last couple of years. Slide 15, risk costs. Overall, unchanged conservative prudent approach on provisioning with improving underlying trends and a strong asset quality performance.
Our focus continues to be on developed and mature countries, with 73% of our exposure in the DACH/NL region and 27% in Western Europe and the United States. We have no relevant exposure in the East and do not have any direct exposure to Russia and Ukraine. In general, we have also been very careful with releasing credit reserves, and the ECL management overlay now stands EUR 61 million, whereas it's EUR 38 million as of year-end. In Q4, we booked EUR 20 million of risk costs, mainly driven by normal run rate in Retail & SME of approximately EUR 14 million. For the full year, risk costs were EUR 95 million, translating into a risk cost ratio of 23 basis points, with the business on a path to full normalization of risk costs in 2022 to around 20 basis points.
On slide 16, I wanted to reiterate our 2022 targets. We are targeting a return on tangible common equity of greater than 17% and a cost-income ratio of under 38%. We expect core revenues to grow by more than 4% and operating expenses to decline by around 2%. Regulatory charges should fall below EUR 50 million, and our risk cost ratio is expected to normalize at around 20 basis points. This would lead to a profit before tax of greater than EUR 675 million for 2022, which is more than 12% higher than our 2021 PBT. Page 17. A few months ago, we held our first Investor Day, where we shared our plans and targets through 2025.
We updated our return targets to a return on tangible common equity to over 17% and cost-income ratio under 38%, which will represent the normalized return targets of our business going forward and which already apply in 2022. For 2025, we target a profit before tax of more than EUR 750 million, earnings per share above EUR 7.25, and a dividend per share of more than EUR 4. There are still three main opportunities that we have not captured in our plan. First, we assume rates are static as of today. An increase of the three-month Euribor by 100 basis points would translate into EUR 100 million of NII. Second, our plans do not assume any M&A, be it bolt-on or large transaction M&A. We will look to acquire investing platforms or small universal banks in the DACH/NL region, Western Europe, or the United States.
The focus would be on Retail & SME, asset originations in deep, broad, and mature markets. All M&A investments would be underwritten to an RoTCE target of above 17% along the lines of overall group targets. Our latest acquisition in the U.S. that we signed recently will contribute over EUR 30 million of pre-tax profit by 2025. This is incremental to our initial target of more than EUR 750 million. Third, today our securities portfolio is underweight as a percentage of total interest-bearing assets. This has been a conscious portfolio management decision, given credit spreads have been very tight over the past decade. If there is a reversion to mean credit spreads, there is also an opportunity to build up our securities portfolio once again.
We will revisit our 2025 targets by year-end based on business developments and our performance in 2022, and we'll consider potential positive effects stemming from our improved operating performance, earnings accretion from recent M&A, and the potential benefits from rising interest rate environment. With that, operator, let's open up the call for questions. Thank you.
Your first question today comes from the line of Mate Nemes from UBS. Please go ahead. Your line is open.
Yes, good morning, and thank you for the presentation. I have three questions, please. First of all, I would like to start with the indirect exposure, potential indirect exposure to Russia and Ukraine. I heard you loud and clear, you don't have a direct exposure, but I was wondering if you could elaborate what do you exactly mean by no relevant exposure to CEE? Secondly, if you could comment on any indirect exposure to the region, be it any sort of interbank exposure. Secondly, any potential Eurozone firms with non-insignificant share of revenues or other exposure to Russia or Ukraine. Anything on that would be much appreciated. Secondly, on the Peak Bancorp acquisition, thank you for the additional details there.
I'm wondering if you could give us perhaps a bit more sense of what is the strategic rationale here. Is this just going to be a retail beachhead in the U.S., or is this something that helps you provide cheaper funding locally that can support the corporate lending business? Should we expect the weight of the U.S. as a contributor to the group increase significantly from here onwards? Finally, just a question on reg charges. I think you're guiding for broadly similar reg charges like in 2021. Can you explain the rationale for this? Are you seeing higher recoveries than expected from the, you know, legacy two bankruptcy cases in Austria? Hence, the lower need for the recovery fund. Thank you.
Thanks, Mate. I hope you're doing well, buddy. I'll go ahead and take the first two questions, and then, Enver, you want to take the reg charges? I would say, Mate, great question. In terms of indirect exposure, so we have no direct exposure to Russia, Ukraine, Belarus, emerging markets, China, I can go on and on. And when we say we have no relevant exposure to CEE countries, we have some securities positions, and banks that we feel very comfortable with in terms of senior preferred, senior non-preferred, which is de minimis. The thing that we've been focusing on, kind of the indirect, is energy-intensive industries, given just the potential impact on energy costs of corporates and the like.
If you kind of go through the different industries from cement to building materials and anything that is heavily dependent on energy costs, when we look at that exposure, it's under 1%. Even that, we feel really good about kind of the indirect exposures, which is really a knock-on effect because of rising energy costs if this continues to spiral out of control. When we look at the exposure of our corporate portfolio to companies that have sales reliant on Russia or Ukraine, it's de minimis. We feel pretty good. The reality, Mate, is this goes back to our focus on, you know, Western, call it European, United States, developed markets, companies that really are domiciled there, and a lot of their business is based in these countries as well.
I think the transparent markets, the rule of law, all of these things, which we've been saying for a decade, and I think you've heard Enver and I speak of this, over the years, that comes into play when you have crises, which obviously is no one's fault here. This was something that we've always factored when we underwrite risk. I think it kind of comes to fruition. You see it today. The U.S. acquisition, the way I think to look at the U.S. acquisition best is it's just another growth channel across another of our core markets. The U.S. has been a core market for us over the past decade. We've historically done corporate and real estate lending, more transactional. Now we have. You'd mentioned the beachhead.
I'd say more it's just a growth channel that we'll be able to originate Retail & SME assets. It's a growth channel just like the Netherlands is a growth channel for NHG mortgages. Germany is a growth channel for us in terms of mortgages and consumer loans. Austria is more full-scale retail banking. We will be able to raise U.S. deposits, but that's the context of how we look at the U.S. acquisition. Then in terms of the overall mix of the business, today we're 73% DACH/ NL region, 27% Western Europe and the States. It's gonna fall between 70%-30%, 75%-25%, a similar split in the years ahead as we continue to grow across our different markets. I'll pass over to Enver on the regulatory charges.
Mate, on the regulatory charges, it is as you said. We expect high recoveries from the insolvency cases that took place over the last years. That's one element. The other element, we use some of the goodwill that we generated through the DEPFA acquisition to front-load some of the regulatory charges as well. That's why we have good line of sight that reg charges will come down, not only in 2022, but also in the next years.
Thank you very much. Very helpful. I have a couple more questions, but I'll rejoin the group and let others ask questions now. Thank you.
Thanks, Mate.
Thank you. Your next question comes from the line of Gabor Kemeny from Autonomous. Please go ahead, your line is open.
Oh, hi. Just following up on Idaho. Can you give us a sense on what your competitive edge is going to be in U.S. Retail & SME lending? You mentioned the group-wide leveraging the group-wide tech and operational capabilities, but a little more color please. You are guiding, I think, more than EUR 30 million PBT from this business in 2025. Which I understand is going to be a balance sheet business basically. Could you give us a sense what sort of volumes are you anticipating to build up here by then? Just the other question on the costs. You are still guiding for a cost takeout, which is similar to the September CMD, which is impressive, given where the trends are heading in the rest of the sector.
Maybe you could elaborate a bit on what you are doing differently, and how do you think about the impact of the inflationary environment going forward? Thank you.
Thanks, Gabor. Great questions. Let me start with the cost and then I'll take where we see opportunities in the U.S. and kind of just the overall thesis there. The cost takeout, Gabor. The past two years, you know, we used the pandemic, and I mentioned it during the going through the earnings pages. We really reflected on what are we doing well and what are areas that we can improve. We took the opportunity over the past two years to really streamline our processes. One example is we looked at our technology group and then we looked at our operations group and we said, "Actually, a lot of this is really converging," so we combined that group, and there was a lot of synergies through that combination.
The combination allowed us to even streamline our front-to-end processes more so than we've done in the past and help us think more holistically about end-to-end processing, which then the outcome of that will be how do you reduce touch points, but also how do you start to think about automation and how do you scale your business even better? That's one example. Another one obviously is, I think the most obvious is your physical footprint, right? The number of branches, your headquarters real estate. We permanently put in place a home office working model. We had one in place pre-COVID. post-COVID, we found that to be incredibly effective.
When we did employee surveys, I think, the majority of responses, I think over 80% or 90%, was people wanted to have the option to work from home for 2 to 3 days a week, and then we've instituted that into our workplace environment. Of course, you have to have the tech infrastructure around that to support people working from home from different cities and different countries. But that's had a direct impact on our real estate costs, which then has an impact on your utilities costs and the maintenance costs and all the other knock-on effects. We also redesigned our organizational setup and streamlined. Despite, as efficient as we've been in the past, there was more areas, to really think through our organizational design and root out any entrenched bureaucracy.
Even though it's unintended, right? You still have to go after it. I think those were some of the lessons learned in the examples. I gave an example of had we not done anything, Gabor, we would have seen 5% cost inflation. Because we have this continuous mindset and part of our DNA, it's not just a buzzword, this is what we live, it's continuous improvement. We questioned and challenged and tried to drive productivity in areas that we thought made the most sense. That's been a big driver in the 2% net cost out despite, I mean, we are seeing inflation everywhere. You have your collective bargaining agreement that'll be 3%-4%. You have wage inflation outside of your collective bargaining agreement, which is when people leave to competitors.
You're seeing that upwards of double digits. In some cases. The energy costs, I think speak for themselves in Europe, and we were able to do things from hedging energy costs, locking in rates over a number of years, to being able to absorb some of the headwinds on that front. There's a whole host of things we can go through a lot of the detail, but I think the key message is we were proactive, and we didn't just stand idle and accept, you know, having a great efficiency ratio. We realized there was a lot more to do, and I think that will continue to inform the way we operate.
That's the reason why you have the net 2% cost of risk, probably one of the few banks, at least from what I've seen reported, that will be able to confidently say we'll have net cost out this year. In terms of the U.S., our edge really goes down to what you'd mentioned, it's gonna be a balance sheet, more of a lender. It's less of a fee business. We like U.S. mortgages. We think the risk-adjusted returns are really good. We think consumer loans done the right way through partnerships and platforms, and we have a number of relationships. We think that'll be pretty interesting, but we can do it.
Idaho gives us an opportunity to have a U.S. bank license and to really scale that business and really try to implement a lot of the, I call it the tech ops, which is your technology and operations know-how from the group to, and kind of the lessons learned, to what we're gonna do in the States. We're not competing with the large U.S. global banks. We're looking at certain asset classes and certain channels that we think are really attractive, and through that, we think we're gonna be able to generate over EUR 30 million of pre-tax profit by 2025. And it'll be through Retail & SME lending. And we feel pretty good about it. It's another core market for us. It's not foreign to us, and it gives us opportunities to continue to grow the business.
We'll continue to grow in the DACH/NL region as well as Western Europe, as well as the United States. Thanks, Gabor.
Okay. Got it. Thank you.
Thank you. Your next question comes from the line of Simon Nellis from Citibank. Please go ahead. Your line is open.
Oh, hi, Anas and Enver. Thanks.
Thank you.
Thanks for the opportunity. Yeah, I guess my first question would just be back on Idaho again. It's a bit of a strategic shift. Can you just elaborate a bit on I mean, it's obviously a platform. So what else are you planning to do there? Are you targeting further M&A? And should we be expecting kind of a very quick ramp-up of SME & Retail? Just a little more thoughts on that would be useful. Also, I think I saw that there's some legal challenges to the valuation, if you could comment on that. And then my other question would just be on the volume growth that you're expecting. What's the pipeline looking like that's underlying the above 4% core revenue growth forecast for this year target? Thank you.
Thanks, Simon. I'll defer to Enver on the volume growth. Not sure he's gonna say much, but on Idaho, just real quick. Primarily organically, Simon, so it's half a billion dollars of balance sheet. We're gonna look to grow that organically through a number of channels that we're looking at, you know, the digital front, but as well as platforms for consumer loans and SME and the like, and mortgages, which we're really bullish on. As far as M&A, it's gonna be in the context of, I think, the M&A that you've seen in the past, if there is any M&A. So small bolt-on type acquisitions. I think more importantly, Simon, the question came in early, I think, from Mate, where you'll start this. It'll be the same kind of. Mix of 70/30, 75/25.
Mm-hmm.
In terms of DACH/NL region versus Western Europe and the United States. I don't see that. I think kind of see that as a kind of a goalpost in terms of our overall exposure. Hopefully, we're growing across all of our markets. As far as the legal challenge, I can't really comment anything, but we feel pretty confident that the deal will go through, so.
Okay.
That's obviously something like the shareholder and regulatory approval.
Yeah. Are you focusing mostly around Idaho region for now, or these rollouts will kind of target the larger part of the U.S.?
Simon, two-pronged approach, right? We have Idaho, and we see a lot of opportunities just within the state of Idaho. It's about two, over 2 million citizens. We see broader U.S. pockets through platforms and partnerships to be able to originate assets using our credit box, and we think that's pretty interesting as far as the channel.
Okay.
Thanks, Simon. Oh, yeah, sorry, Enver, you had the volume growth.
Yeah. Enver, on that volume, please.
Yeah. Thanks, Simon. Just overall, I think what I said, you know, part of the NII increase we are expecting for 2022 will be obviously from volume growth. I will, you know, we don't give specific numbers, but I would think about it more in the context also of the, you know, 4% or more than 4% core revenue growth that we are indicating.
Okay. I mean, so margins you're expecting to be roughly flat.
From the net interest margin, you're saying? I mean, if you look.
The margin.
If you look at the last couple of quarters, I think net interest margin moved like what, 1 basis point- 2 basis points. So it was really extremely stable, and that's what also we expect to happen in 2022. As I said, we don't assume any rate hikes, which will obviously change the picture if that happened.
Mm-hmm. In terms of the mix of volume, so are you expecting it to shift in any way, like reduction of consumer or?
We are not disclosing that yet.
Okay. I'm just wondering about the outlook for the environment, right? I think last year's have been slow for consumer. Obviously, things might change now.
Simon, we saw a pickup in the consumer loans in the second half of last year. Hopefully, that continues that kind of pace. Yeah, it was really driven by housing loans large part. We'll see how it goes for 2022.
Okay. I'll stop pestering. Thank you.
Thanks, man.
Thank you. Okay.
Thank you. Your next question comes from the line of Izabel Dobreva from Morgan Stanley. Please go ahead. Your line is open.
Hello, good morning. I had a couple of questions.
Hey, Izabel.
Hello. Firstly, I had a follow-up on Idaho. I know you elaborated already a little bit, but could you expand a little bit on the strategic rationale as to why you chose to go into U.S. Retail? How does that fit with the rest of the group franchise? I'm thinking here more around what led to the decision to prioritize expansion in the U.S. compared to, say, an acquisition in Europe. Overall, should we expect for you to keep doing M&A in the U.S. and, you know, bulking up the market share around that cluster? Is that the long-term vision here? My second question is on NII. I've seen the guidance of EUR 100 million per 100 basis points.
Could you help us understand how that impact differs for the first 50 basis points relative to the next 50 basis points? Is there a difference in the sensitivity up to the zero bound and then beyond? I also assume this guidance is on a static balance sheet. What would be the incremental upside if we also normalize the size of the Treasury book? Finally on the buyback, I had a question. When would you expect to launch execution? You know, if we think about liquidity volumes, how long would you expect the execution to run for? Thank you.
Thanks, Izabel. Let me start with the buyback in the U.S., and then Enver will take the NII. As far as the buyback, look, we put the application in with year-end results, as I mentioned, as we went through the earnings. We can't really comment any further. We look forward to hopefully being able to execute during the course of 2022. I think you have a number of examples on other banks, so hopefully that's a good proxy. That's as much as I can say on the buyback, but we feel confident there. The question on the U.S., again, this one, Izabel, if there's a great opportunity in Austria, like Hello bank! Austria, we're gonna be able to execute.
If there's a great opportunity in Germany, we'll be able to execute on that from an M&A standpoint, or any other core market for us. This was a really interesting opportunity to be able to have a growth channel in the States and to be very disciplined and kind of growing in asset classes that we think we understand, and that generate great risk-adjusted returns. You should not read into it that is a strategic shift in any way. We have seven core markets, right? We have Austria, Germany, Switzerland, Netherlands, the U.K., Ireland, and the U.S. We will continue to look at opportunities across those core markets. They come in different shapes and sizes and different opportunities. Sometimes it's a bank, sometimes it's a platform, sometimes they're portfolios. The consistency is a focus on risk-adjusted returns.
There's a focus on efficiency, and obviously we manage everything at a group level. There's really no more to read into it than that, and it was a really good opportunity we thought to be able to drive growth, and profitable growth at that. Enver, do you wanna-
Yeah. Izabel, good question on the NII sensitivity. You know, you would see an NII pickup from the, you know, first rate hike. It's very similar for the first 50 basis points and the second 50 basis points in our case. It's slightly more skewed to the second 50 basis points than the first, but it's very comparable.
Thank you very much. Could you comment on the size of the Treasury portfolio, given the move we have seen in the swap rates?
Yeah.
The bond yields year to date? How are you thinking about deployment?
Yeah. I mean, we don't focus so much on the, you know, interest rate situation in the Treasury book. It's more on the credit spreads, right? That's why we have been underinvested in the Treasury portfolio for the last couple of years. Now, I believe we stand even below 15% of total assets. You know, if you go back, I mean, you can see also picture where we have 25%-30% at the right levels. I'm not saying that would happen overnight, but there's a lot of potential actually to increase that portfolio, if the spreads are right and the quality is right, obviously.
You know, Enver mentioned it during when we went through the pages, Izabel. If you just look at this credit spreads this year so far, they've widened by 25 basis points across senior financials or euro investment grade. We think historically they've been incredibly tight, that potentially there's an opportunity of repricing of risk here. If that takes place, we have ample capital and liquidity, and we'll be able to redeploy as we've been underinvested in securities for a number of years. That could be an added benefit. We'll be patient, right? No different than any of the years past.
Makes sense. Thank you very much.
Thank you.
Could I ask one more question on loan growth, if you have a minute?
Yeah, go for it.
Could you give us a view on mortgage loan growth in Austria and in Germany, given the countercyclical measures which are being activated in both markets?
Enver?
Look, Izabel, I mean, it's probably a bit too early to see that impact. Right now we are not really seeing it, you know, in the customer demand. The new business was very stable after the measures have been announced. We still believe there is significant customer demand in both markets. I think, you know, there might be an impact from that. What is more important, I think, is with the increasing rate environment, what impact will that have? We think that is more relevant than the, you know, macro-prudential measures being put in place.
Yeah.
Thank you very much.
We're very supportive of those macro-prudential measures. I think it's a really positive thing. It brings more or introduces much more discipline into the market. We found it sometimes challenging given the overall pricing. It'll be interesting how people price mortgages, especially given the movement in 10- to 20-year swaps, if that's really reflected in. I think that overall brings more discipline to the market, and that's a good thing.
Thank you.
Thanks very much.
Thank you. Your next question comes from the line of Johannes Thormann from HSBC. Please go ahead. Your line is open.
Good morning, everybody. Johannes Thormann from HSBC here. Thanks. A follow-up question first on your mortgage business. You just explained the German business should have no impact from the tightening of the countercyclical buffer. On the other hand, it will only happen in February 2023. The question is, you described yourself as being more in the niche areas of the German market. Is this only in terms of the different durations or also in terms of the LTV? The next thing is, on the mortgage business, you have so far done your mortgage business in Europe from one platform. Will this platform be used in the U.S. or at least the technology, or do you have to do, because of the regulatory differences, a completely different platform in the U.S.? That's my first question.
Secondly, you just elaborated that you're looking for bolt-on deals in M&A terms. Is there any size limit from your perspective where you would say we don't feel comfortable acquiring a bank with EUR 20 billion assets or with a purchase price of more than EUR 1 billion or so? The last question would be just on the regulatory costs. Any idea what the potential implications would be if there's a bank which needs to be bailed out and EUR 1.1 billion deposits or insured deposits have to be paid by the other banks? Thank you.
Thanks, Johannes. You wanna go ahead and take on?
Yeah, a lot of questions. So I think on the mortgage business, we are a niche lender. Doesn't mean we are lending kind of the niche products in Germany. So when it comes to mortgage, I think our offering is very similar to the market. There might be here and there some product features that we focus more than you know the rest of the market. You're right, the countercyclical buffer will only kick in 2023, but you would still expect, right, that the market you know kind of adjusts to that. We haven't seen that yet reflect in the pricing. With that being said, we hope actually it will bring more discipline to the pricing of the mortgages. That's our expectation.
Johannes, the niche is when we say niche lender in Germany, it's more specialty finance, so factoring, IT and mobility leasing. Those are the type of when we say niche or consumer loans. Mortgage is pretty plain vanilla. Quite frankly, mortgages have been, we think, mispriced to a large extent in Germany for some time. Hopefully these macro-prudential developments will bring more discipline. Let's see. Sorry.
I think next question was on the different platforms between U.S. and European business. Obviously, there will be a difference, right? I mean, it's different payment system, different processing system, so it will be two different platforms. We will still try to, you know, leverage what we have from a group perspective that we could also use for the U.S. market. Third question I had was the bolt-on acquisitions. I mean, no, I think we said in the past, we would like also to do larger M&A, but it's, you know, it's what is available in the market, what makes sense from a kind of risk return perspective. No, we are absolutely willing to do large M&A, and even in the case that we would need to raise capital, I think we are willing to do so. But it will depend on the opportunities that we see.
Just to add, when we think about large M&A, that would be something which we would target as far as a large operational turnaround, and that would be more focused to the DACH/NL region, where we have a real opportunity to drive synergies. That's not for some of the other markets, in particular the U.S., right? That's more small bolt-on. When we say we're open to all acquisitions, the large is really more in the domestic market, in kind of the adjacent markets to Austria.
I think the last one, you, I guess you're addressing the Sberbank Europe situation. Look, I think it's totally manageable. It's not a large bank. It's not clear what is going to happen. Even if we would assume the deposit guarantee scheme case, which is again not the case right now, the impact overall would be quite limited.
Okay. Thank you.
Thank you.
Thanks, Johannes.
Thank you. Your next question comes from the line of Tobias Lukesch from Kepler. Please go ahead. Your line is open.
Yes, good morning. Just two follow-up questions on issues we have almost touched on. On the mortgage business first, with regards to the price volumes you're seeing in the DACH/NL markets, are you kind of extrapolating the nice mid-single to high- single digit growth, both in volumes and prices that we've seen in these markets. Or, is there any other underlying assumption you may have for that? You said it's plain vanilla. Are you expecting, you know, further margin pressure? I understood that in the past you also highlighted the fact that Germany is very competitive and that it's really hard to go for volume in that market. Secondly, yeah, there are some pilot schemes on artificial intelligence and so on to ramp up volume.
Is that something which is really material in the coming years or is this rather a subject for the second half of that decade? Secondly, on the developments, of course, Russia, Ukraine and so on, you just mentioned there will be hardly implication potentially for reg charges and so on, if I understood you correctly. But thinking of your business, I mean, you came through the pandemic quite well. You have an exposure which was hardly hit, you know, by pandemic issues. Now again, hardly hit by this Russian-Ukrainian situation. Is there any change to the business strategy or tactics that you have talked about which are on the cards and where we may see a different approach to something? Is that still yet to be seen, a very external given and not yet to be discussed? Thank you.
Thanks, Tobias. I'll take just the second one in terms of no change in our strategy. It's the same strategy that we've had since 2012. It's pretty straightforward, right? Focus on developed, mature markets, stable legal system and ability to enforce. That's why we say stable legal systems, right? Transparent markets where investors have confidence that you can both invest and lend into. That stays the same. Our underwriting has been very disciplined in the past. Even with the macroprudential kind of measures that are put in place. We are supportive of that because we think that's the right thing to do, and it reflects a kind of a conservative credit box they're able to apply. We'll, you know, we're not gonna put any volume targets.
That's been kind of our approach in terms of how we grow our business. We think when you do that, you do irrational things. We don't put volume targets in our corporate real estate and public sector business, nor in our Retail & SME. You know, if the opportunities are there, we're gonna be able to hopefully exploit them. If they're not, we're gonna be patient. That's from a strategic standpoint, nothing that we're changing. I think our strategy has been sound. You focus on the things that you can control, Tobias, which is your cost and your risk appetite, and you take what the market gives you, right? If there's opportunities, we'll be able to. We have capital and liquidity. I think we're blessed in that respect. We'll be able to deploy it.
If their risk-adjusted returns are not there, we'll just be patient. That approach has served us well over the past decade, and I think, will continue to be our North Star in terms of guiding us how we run the bank. You wanna take that?
Yeah, I think the last thing that Anas said is basically the key principle when we think about, you know, volume growth. We basically don't focus on volume growth, right? That's always been, you know, risk adjusted when you don't chase volume. The same is true for mortgages. We don't provide, as you know, kind of, you know, single product guidance for what we expect. But I can tell you know, how we thought about 2022 is, it was a very, very strong 2021, you know, in terms of loan growth. We were more prudent and more conservative on the assumptions for 2022.
It will again depend on the pricing in the market that is taking place and also the, you know, interest rate moves that we have seen over the last couple of weeks, especially how that gets translated into, you know, real business. If we find, you know, risk-adjusted pricing to be fine, we will obviously continue to grow our market share. If not, we are happy not to do the business as well. You know, that was always our key principle.
One thing you had mentioned, Tobias, in terms of just AI, and I think some people sometimes think that that's a big driver and that's all the innovation. The reality is what we've seen the most beneficial innovation is simplifying your process, reducing your time to, yes, on the mortgages, right? Having a middle office sales support that can address the broker channel or aggregator channel be very responsive, being disciplined with your credit box. The basic blocking and tackling, that's what makes all the difference, right? Then obviously you automate parts of the value chain in terms of that overall end-to-end processing. That more than anything else. You got to be disciplined also on pricing in terms of in your credit box, and we'll never sacrifice that. Those are the things from an operational standpoint that I think gives us an edge. Thanks.
Very clear. Thank you. Third one, if I may, quickly on capital, just to interpret the kind of post share buyback at 12.85% quarter one ratio. Is that a kind of new regulatory guidance target, so to say, to be rather closer to 13% than down to 12%? Given the current environment, is that something we should basically incorporate a bit into thinking, you know, it's like calculating potential dividends or further share buyback potential for the coming years?
No, I think really nothing to read into the 12.85% on a pro forma basis. That 60 basis point buffer gives us opportunity to pursue organic growth M&A. We've always said we'll do an assessment on an annual basis. We still have our target of 12.25%, despite the P2G being reduced from 1% to 75 basis points. You saw that in our ECB stress test. Nothing to read into it. We're sticking with our target. Thanks, Tobias.
Thank you.
Thank you. Your next question comes from the line of Jovan Sikimic from RBI. Please go ahead. Your line is open.
Good morning, guys. I had just one follow-up question maybe on the strategic one from the previous analyst. It is about can you imagine under some, I don't know, special circumstances, maybe we have them right now to go for any kind of M&A in Central Europe, outside the DACH region, should something really interesting appears. Second, the question I have one technical is-
No, Jovan. Jovan, on that one, no.
No, no.
Nothing.
Okay, good. All good. Fine.
Just to be clear. I know what you're saying, the question, it's a good question, but that's not our risk appetite.
Okay.
You know, we understand this part.
Times are changing and yes, that's right. Okay, thanks for this. Perfect. Technical one, I think there was a bit of corporate growth in the fourth quarter. Does it come from some DEPFA consolidation or any other special issues, or was it kind of just normal business? If you just explain that, please.
Yep, just normal course of business. I think the DEPFA was like EUR 200 million or so round about.
Okay.
Out of public sector office. Yeah, but it's normal business, I'd say.
Okay. Okay. Thanks a lot. Thank you.
Thanks, Jovan.
Thank you. We will now take our last question, and the question comes from Mehmet Sevim from JP Morgan. Please go ahead. Your line is open.
Hi, Anas. Hi, Enver. Thanks very much for the presentation and congratulations. Just one question.
Thanks.
I know you may not be able to answer this, but in any case, have you had any initial conversations with the ECB, and do you have a feeling that their view may change on SBBs right now, given the current geopolitical situation? Not in a specific way to BAWAG, but just in general, and do you think there could be any delays to the approval process on that?
Mehmet, you know, we're limited in what we can say, but we have not. Obviously, these are fast-moving events and more recent. We feel comfortable in terms of the capital generation that we have on an annual basis. We've been conservative in terms of our targets. I think we've been good stewards of capital. We'll leave it at that, but no, we have not had any specific conversations.
All right. That's fair enough. Thank you very much, Anas. Thank you.
Thanks.
Thank you.
Okay.
Sorry, sir. I will now hand the call back to you for closing remarks.
Thank you, Operator. Thanks, everybody. Really appreciate the time this morning. Look forward to catching up with everybody for first quarter results. Take care and stay safe. Bye.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.