I am [Siergen], the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast at this time. It's my pleasure to hand over to Thomas Sommerauer. Please go ahead.
Thank you, [Siergen]. Good morning to everybody who is listening in. We follow our usual conference call routine this quarter again. Peter Bosek, Chief Executive Officer of Erste Group , Stefan Dörfler, Chief Financial Officer of Erste Group , and Alexandra Habeler-Drabek, Chief Risk Officer of Erste Group . We lead you through a brief presentation highlighting the financial achievements of the past quarter, the second quarter of 2025, after which time they are ready to take your questions. As usual, my reminder on forward-looking statements and the disclaimer on page two of the presentation, and with this I hand over to Peter Bosek. Please go ahead.
Thank you, Thomas. Good morning ladies and gentlemen. Welcome again to our Second Quarter 2025 Conference Call. Quite a few things happened over the past quarter.
We announced the acquisition of a controlling 49% stake in the third largest Polish bank, Santander Bank Polska. We are excited about this move because of its tremendous long-term potential for our shareholders, leading to a significant earnings per share uplift starting from 2026 and a better growth profile of Erste Group overall. We also made a big step forward in our capital position with a common equity tier 1 ratio reaching 17.4% at half year, which puts us right on track for the first time consolidation around year end 2025. Leaving this transformatory transaction aside for a minute, let's now focus on the second quarter performance of our existing business because this was not bad either. Not bad at all. I'm tempted to say I'm on page four of the presentation.
Core revenues developed well with net interest income up both quarter-on-quarter as well as year-on-year. Fees moved sideways for another quarter, but were up comfortably year-on-year. This is actually the revenue line item where we are most bullish on going forward, and with all other revenue items as expected, we bring record quarterly revenues. Costs were also in line with budget and risk costs again came in substantially below the full year guidance. Despite the fact that we had no material changes in FLI and overlay provisions. On top of the strong operating performance, we had some additional tailwinds in other operating results this quarter, and if you put the whole picture together, we reached an excellent return on tangible equity of 17.5% in Q2 2025. Based on these numbers, we reviewed our full year guidance and decided to upgrade several items.
We now expect that net interest income will grow slightly in 2025 as opposed to remaining flat. As we have upgraded the fee outlook just last quarter, we see upside potential to our cost/income ratio guidance of lower than 50%, principally driven by higher revenues, but keep these unchanged for the time being. We also improved the risk cost outlook to around 20 basis points and lifted the return on tangible equity outlook to higher than 15% compared to about 15%, despite expecting a material increase in our equity base. When we look at our P&L performance metric in more detail on page five, we can see that the net interest margin bounced back quite nicely in the second quarter. This was driven by higher net interest income while at the same time interest-bearing assets remained flat quarter-on-quarter.
The latter resulted from lower interbank business volumes while customer volumes showed improving trends. Based on the second quarter performance, I can confirm what I said last quarter, namely that the best estimate for net interest margin in 2025 is around 2.4%, plus or minus a couple of basis points higher. Net interest income was also the key driver behind the quarter-on-quarter improvement of the cost/income ratio. The risk cost ratio was stable quarter-on-quarter, tracking well below our original 2025 guidance thanks to continued strong asset quality in CEE as well as somewhat improving trends in Austria. Banking taxes have come down quarter-on-quarter on seasonality, but were and will continue to be above the level seen the previous year on account of the higher banking tax burden in Austria. Despite this, as already mentioned, second quarter return on tangible equity topped 17%.
As far as the balance sheet is concerned and I'm on page six. In the meantime, I would like to highlight the solid volume trends in customer loans as well as customer deposits. In a year-to-date view, loan growth at 2.7%, most notably growing in Central and Eastern Europe, maybe with the exception of Romania. Importantly, in Austria we also registered increased demand, especially in the second quarter. In terms of business lines, growth was somewhat more pronounced in retail than in corporates, mainly driven by the consumer segment but also accelerating mortgage loan demand, especially in CEE. These positive developments were helped primarily by somewhat lower client interest rates. Customer deposits advanced by 2.8% year to date, mainly in the Czech Republic, Hungary, and Austria.
We have seen good growth direction in retail deposits across CEE but also in Austria, while the key growth driver in the corporate space was public sector and primarily in the Czech Republic. Overall, our core retail and SME deposits advanced by 1.8% year to date. To sum it up, volume trends are good and improving, especially on the asset side. In addition, growth is well balanced between the gross assets and liabilities with a more even distribution throughout the year than we have seen in 2024. Last quarter I said that it was too early to upgrade our loan growth guidance just yet, but this time, given the growth evidence in the second quarter, we are now confident that loan growth will exceed our original 5% growth target in 2025.
Moving to our key balance sheet indicators on slide seven, thanks to our overall strong business performance, all parameters continue to be excellent. Our stable loan to deposit ratio at 90% reflects balanced loan and deposit growth. As already mentioned, asset quality continued to be very good. The NPL ratio improved to 2.5% since the start of the year, while the NPL coverage ratio is at 73.6%. In Austria, which was responsible for the slight consolidated asset quality deterioration over the past quarters, we saw a trend reversal in a positive direction at the savings banks, while Erste Bank Austria saw only a minor further deterioration. The asset quality situation across Central and Eastern Europe remained very strong. As usual, Alexandra w ill provide you further color on credit risk later. Let me now turn to capital because we have made some tremendous progress here.
This is all the more important. More important is our decision to fully fund the Polish acquisition from internal resources, thereby avoiding any kind of share count dilution. This required us to build up capital in an accelerated manner between the first quarter and the year end, and I'm happy to report that we have done just that in the second quarter. The CET1 ratio now stands at 17.4% with two quarters to go until year end. Clearly, this brings benefits from adding back the previously deducted share buyback and the lack of any dividend accrual, but also from strong profitability. Of course, significantly, this figure doesn't yet include any meaningful effects from balance sheet optimization measures. With these, we have laid a strong foundation for successfully financing the transaction, possibly with some capital to spare at the year end. With this, let's now examine the macroeconomic environment.
I'm on slide now. Slide nine. The short story is that despite all the noise, not much has actually changed since we last reported at the end of April. We still talk about tariffs, although based on the recent news, the topic seems to be resolved between the U.S. and the European Union. We still talk about Germany's fiscal bazooka, and yet economies hardly changed their forecasts for our region. For Austria, growth forecasts were up a little but still are anemic. For CEE, we saw either no changes or slight reductions of growth expectations. One important takeaway remains though: CEE will grow faster than Western Europe, which of course is good news for our shareholders. All other macro variables remain broadly unchanged. Consumer price inflation is still forecast to hover in the low to mid-single digits in the CEE region in 2025.
Current account balances for most countries are set to remain manageable in many of our markets, especially those that reported larger deficits in 2024. The budgetary situation is forecast to improve in 2025, which will help keep public debt in relation to GDP at sustainable levels. Given all the moving parts and also accounting for the uncertainties that are clearly out there, the performance of the first half of 2025 proves that we can operate very profitably even in challenging business environments and expect more of the same for the second half of the year. After macro, let's see how the micro level performed in the second quarter. I'm on page 10 now. Retail volume momentum was strong and accelerating. We saw continued healthy demand for consumer loans, especially in Romania, while mortgage demand also picked up significantly.
The latter was particularly pronounced in the Czech Republic, but in actual fact visible across most of the Central and Eastern European countries. Lower interest rates and strong labor markets were major drivers. Importantly, in Austria the same thing played out, albeit at lower growth rates. Asset quality in the retail business remained excellent. On the liability side, volume trends were equally encouraging with good quarter-on-quarter as well as year-on-year growth rates. The structural shift back towards current accounts, current account deposits from term deposits continued, not unhelpful as far as future net interest income performance is concerned. Stefan will give you more detail about this shortly. At the same time, our security savings plan business that enables customers to build long-term wealth in an easy-to-manage digital format continued to grow rapidly. The stock of such savings plans exceeded 1.8 million, supporting long-term fee growth in our asset management business.
George, our digital platform for retail clients, hit a new milestone with 9 million monthly active users, helping us to push the digital sales ratio in the retail business to 67.6%. In the second quarter, almost 70% of consumer loans and more than half of insurance products were sold digitally. Going forward, it's our ambition to develop George into a fully fledged financial advisor for our entire retail customer base. In the corporate segment, I'm on page 11 already. Loans were up 6.3% year-on-year and 2.1% quarter-on-quarter. Growth was particularly encouraging in the large corporate and SME business lines in the second quarter. In terms of product, growth was fairly balanced between investment and working capital loans. Czech Republic, Austria, and Serbia were the clear growth leaders.
The markets business built on a strong start to 2024, positioning an increase in net profit in the first half of this year. Our ECM and DCM teams once again did an amazing job successfully executing 165 transactions with higher issuance volumes than a year ago. The asset management business also showed a very healthy second quarter. Assets under management rose to a new all-time high of EUR 95.6 billion, supported by solid retail sales and minor M tailwind. With that, I hand over to Stefan for the presentation of the quarterly trading trends.
Thank you very much and good morning everybody. As always, I start with lending dynamics on page 13 and I would like to provide you with a couple of geographic highlights. Our Czech business once again turned in a strong performance in the past quarter both in relation to retail as well as corporate business. Growth on the retail side was mainly driven by mortgages where we enjoyed double-digit growth of 11% on an annual basis. Slovakia also did well, which is noteworthy given the high base. Similar to the Czech Republic, the retail business benefited from improved mortgage loan demand where year-on-year growth topped 7%. In the same period, corporate loan grew somewhat less. Hungary was also a country where retail business clearly outperformed the corporate business and there again it was the mortgage business up almost 13% year-on-year. In Croatia it was no different.
Retail mortgages up almost 16%. That is of course on a little bit smaller base than in the countries I mentioned before. Romania Peter mentioned it was the only country showing a quote unquote decline. However, this was purely driven by public sector volatility while the consumer and mortgage loans developed very well. If you connect all the dots, a clear picture emerges in front of us. Mortgage lending in Central and Eastern Europe is back. In Austria the situation was different in so far as corporate loan growth outpaced retail growth and within the retail consumer loans grew faster than mortgages. Still, mortgage demand also in Austria showed an improving development in the second quarter. Given the good loan volume trends in Central and Eastern Europe and improvements in Austria, we decided to upgrade our full-year loan growth guidance to above 5% year-on-year for the year 2025.
Moving on to page 14, one can say that the good news on volumes continue with deposits. I would like to expand on a topic that Peter already touched on briefly and that is the increasingly favorable structural shift and our last retail deposit base of almost EUR 170 billion from term deposits back to current account deposits or put differently from the more expensive to the cheapest retail deposits. If this trend continues and this is not an unreasonable expectation, this means nothing less than lower funding costs for us with corresponding positive read across on net interest income.
More about that in a minute.
In addition, our retail deposit base grew at a higher rate, up 6.7% year-on-year and 2% quarter-on-quarter, than deposits in our corporates and markets business, which exhibited their usual volatility. Volatility in large corporate and public sector has also been the driver of geographical differences, while retail growth was healthy and widespread. All in all, consumable deposit growth ticked all the boxes in the second quarter, with retail deposits growing fastest and within retail, current accounts posting the best quarter-on-quarter. Let me now move to net interest income on page 15. We have already talked about quite a few input factors for NII, and all of them develop positively. It should not come as a big surprise that we upgrade the 2025 outlook for net interest income.
Given favorable volume trends on both the assets and liability side, combined with a helpful business mix, good deposit pricing power, plus a reasonably constructive interest rate backdrop, we now believe that we can grow net interest income over the year 2024. This is supported by a strong quarter print of Q2 2025 of more than EUR 1.9 billion. In fact, year to date we are already up by 2.7%. As a result, net interest margin also bounced back to the 2.4% handle, something we see as a realistic assumption to be hovering around for the rest of the year. The geographic highlighting is the NII stabilization in Austria, and the savings banks benefited from significant downward pricing of deposits, while downward pricing of variable rate loans showed a slowdown.
In the Czech Republic and Slovakia, continued deposit repricing made a positive impact, compounded by higher bond income as well as normal course of business. Balance sheet management activities supported the results in the holding, which you find in the other Austria segment. Our sensitivity, always very important for the read forward to rate cuts, is more or less unchanged at about EUR 200 million for 100 basis point instant downward ratio, with a bulk of the impact expected at the minority owned savings banks, so no big deal for the shareholders. On to fees on page 16. Net fee income rose by a healthy 7.2% year-on-year and edged down slightly quarter-on-quarter by 2.4% from the record levels we have seen both in Q4 2024 as well as Q1 2025.
The year-on-year drivers were by and large the same as in previous quarters, namely payments, securities, and insurance brokerage, even though in payments this is obscured by the shift of loan account fees from payments to lending. As of the first quarter 2025, this was roughly at EUR 12 million - EUR 13 million impact. The best performance was registered in the Austrian segment on account of higher insurance and security fees. The jump in the Other Austria segment resulted from asset management fees attributable to the integration of new companies but also good and very much upward drifting sales. Looking specifically at the quarter-on-quarter drivers, payment and insurance brokerage fees held up well while securities fees trended slightly weaker.
Based on the strong year to date performance, we confirm our full year guidance which we upgraded after the first quarter and we confirm the growth to be exceeding 5% in 2025. Let me turn to operating expenses on slide 17. Quarter -on- quarter costs were effectively flat as higher wage costs on the back of regular annual wage settlements in Austria were effectively fully offset by the seasonally lower deposit insurance contributions which are mostly booked in the first quarter of any given year. Year on year cost inflation was tracking somewhat above our target. Once again, this was driven by higher personnel costs but compounded by higher IT, marketing, and consulting costs mainly manifesting itself in the Austrian unions. The increase in the Other Austria segment was partly driven by M&A activities in the asset management sphere that benefited us on the fee front.
As just mentioned before, since some of the drivers of the Q2 cost expansion should not be reoccurring and also taking into account the elevated cost sprint in the fourth quarter of 2024, we are confident to deliver on our 5% cost target in 2025. We are summarizing our operating performance on page 18. With quarterly revenues hitting a new all-time high and costs being elevated, we produced a quarterly operating result of just above EUR 1.5 billion. Despite this strong performance, cost/income ratio deteriorated slightly year-on-year to 47.5%, still at a respectable level and well inside the full year guidance of below 50%. Quarter- on- quarter we saw an improved operating performance as revenue growth, mainly driven by strong net interest income, outpaced cost inflation. Consequently, our cost/income ratio improved somewhat quarterly, as we are already well inside our 2025 cost/income ratio guidance of less than 50%.
We confirm this outlook unchanged, acknowledging that based on the first half performance a tick of room for improvement could be forming. With that, over to Alexandra for more details on the credit distribution.
Thank you, Stefan, and good morning from Vienna. Also from my end. Let me guide you through page 19. In the second quarter of 2025 we posted risk costs of EUR 97 million or 17 basis points. A year ago risk costs were even lower. Back then, and you surely remember, we benefited from FLI and overlay releases in the amount of EUR 88 million as opposed to only EUR 6 million this quarter. Net net we actually saw an improvement here and quarter risk costs were broadly stable this solid year. To date performance is a result of lower NPL inflows in the Erste Bank Oesterreich and the savings banks, while the credit risk performance in our CEE operations remained excellent.
As far as FLI and industry overlay provisions are concerned, we still hold a stock of about EUR 480 million, almost unchanged compared to the first quarter as the net effect from the FLI releases in Romania and top-ups in Austria was negligible. Accordingly, we are now adjusting our forecast of such provision releases in the remainder of 2025 from EUR 190 million, or max EUR 190 million as was the latest, to about EUR 140 million, of which roughly half is expected to have a net positive P&L impact, while the other half will be used for expected changes in risk parameters. Given the good first half performance, we decided to upgrade our risk cost guidance for the full year 2025 to about 20 basis points simply because economies are holding up reasonably well, loan growth has picked up and defaults have certainly not increased year-on-year.
Let's now turn to asset quality on page 20. With a consolidated NPL ratio of 2.5% and an NPL coverage ratio excluding collateral of 74%, asset quality remains strong across our footprint. Overall, the NPL ratio benefited from, as already mentioned, lower NPL inflows and also significantly higher recoveries year to date, as already mentioned in the context of risk costs. Central and Eastern Europe continued to excel with Romania being the only outlier. There we saw some NPL inflows related to agricultural exposures which visibly pushed up the NPL ratio. These are few single cases, so we expect this to remain a one-time event. On the positive side, we saw improvements in Austria, most notably at the savings banks which were the main driver of asset quality deterioration over the past couple of quarters.
As NPL inflows slowed down significantly in the first half of 2025, also at Erste Bank Oesterreich, the deterioration in asset quality slowed. I believe that our assessment that we have seen the peak in defaults in Austria is still correct, even though I would caution against overestimating the speed of recovery given the still difficult and somewhat choppy economic environment. In terms of projections for 2025, we expect the group NPL ratio will stay more or less at current levels, so 2.5%. Similarly, coverage is expected to remain probably unchanged, maybe rather a little up until the end, subject to the structure of new defaults and the magnitude of further flavor releases. With this I already hand back to Stefan.
On page 21, let's briefly look at how the other result performed this quarter. In short, it was once again affected by one-offs, this time in a positive gain. We booked a one-off in the amount of EUR 88 million as a result of a technical change in the inclusion of an associate. This amount is entirely a catch-up effect from past years. This meant that other results came in very light this quarter, especially when compared to the previous quarters and also the quarter a year ago, both of which were affected by negative ones. Please note that neither the second quarter nor the first quarter are used for guides for any run rate, but probably something in between, highly dependent on one-offs.
Looking at our net result development on page 22, the combination of strong operating performance, moderate risk costs, and a positive one-off in other results brings a strong second quarter with EUR 921 million net profit. Comparing the first half year of 2024-2025, the EUR 1,665 million net profit is 2.2% above last year. Therefore, and despite the strong increase in our equity base, we upgrade our return on tangible equity guidance to greater than 15%. Given the signing of the Santander P olska acquisition on May 5th, our capital position has even more taken center stage. Hence, let's now move to the wholesale funding and capital search. Looking at page 24, we have talked already about Erste Group Bank's highly granular and well-diversified retail and SME deposit base, which of course remains the key source of our long-term funding.
The wholesale funding volumes decreased year to date as higher stock of debt securities was more than offset by decline in interbank deposits, in particular repos, and the stock of debt securities was pushed up primarily by issuance of covered and senior preferred bonds, resulting in the updated debt maturity profile on page 25. As you certainly remember, we had a busy first quarter that included three benchmark transactions, two EUR 750 million green senior preferred bonds and a covered bond in the volume of EUR 1 billion. In May, we successfully executed our largest ever AT1 transaction and also added to our pool of covered bonds. Both transactions had a volume of EUR 1 billion each. With these year-to-date placements, our annual funding plan is very comfortably on track.
Let me now refer you to page 26 and talk about one of the key achievements of this quarter, and that's the very fast capital building. Obviously this is connected to our Polish transaction and the related fact that we have decided to fund this acquisition exclusively from internal funds in order to maximize shareholder value. Consequently, we need to build capital quickly and manage to do so at quite some speed. In the past quarter Q2 2025 alone, we added EUR 2.6 billion in CET1 capital and more than EUR 3 billion in total capital. This resulted from the inclusion of interim profits as well as minority profits, the cancellation of the share buyback in the amount of EUR 700 million, and limited dividend accrual requirement plus our largest AT1 issuance to date.
As mentioned, while a Tier 2 benchmark transaction in the amount of EUR 500 million was called, risk weighted assets development was also contributing positively this quarter as increases driven by business growth were at least positive, partly offset by rating upgrades and to a lesser degree by migrations to default. In Austria, Market Risk RWAs, thanks to active exposure management, continued to decline in the second quarter, thereby also supporting a favorable RWA print. With this, we move to the CET1 year to date waterfall on page 27, the CET1 capital enjoying a massive boost and RWA growth being muted in the second quarter, the CET1 ratio increased significantly to 17.45% to be precise. With this, we are an excellent way to beat our goals set out in the Santander P olska acquisition presentation in May.
We have two more quarters to go in 2025, two more quarters that are not burdened by dividend accruals and that will benefit from strong business dynamics as already mentioned earlier in the presentation. Hence, let me close with a little bit of scenario analysis for you here. Assuming that we will close the Santander Polska acquisition in early 2026, we target a year end CET1 ratio above 18.25% on the current SDU parameter or alternatively of comfortably higher than 13.5% if the transaction still closes inside 2025 with the assumption of the RWA drawdown unchanged at about 460 basis points as a result of first time consolidation of Santander P olska.
We should then be well on our way to exceed our post consolidation CET1 ratio target of 14.25% during the course of 2026 and at the same time return to our dividend payout policy of 40% - 50%. With this, I hand back to. Peter for the outlook.
Thank you very much, Stefan. I'm concluding this presentation with our detailed financial outlook for 2025 on page 29. We had a very strong first half of 2025 with improving volume momentum almost across the entire group. Hence the upgrade of the loan growth guidance to about 5%. Beta volumes of course means beta revenues. Last quarter we already upgraded the fee outlook and now it's NII's turn. We expect net interest income to actually grow somewhat in 2025 despite the volume and revenue upgrades. We stick to our cost/income ratio forecast of less than 50% even though we see upside potential there. Rated risk performance has been strong as well. Hence we are tightening the risk cost guidance to about 20 basis points from previously 25. Finally, we are lifting our return on tangible equity outlook to about 15%.
To sum it up from my point of view, there are three key takeaways from today's result presentation. Number one, our existing business is going strong as evidenced by the broad-based upgrade of our 2025 financial outlook as just presented. Number two, we are right on track for first-time consolidation of Santander P olska around year-end 2025, not least supported by the faster than expected capital build. Number three, the future will even be brighter from 2026 onwards as the new SD group will grow faster and even be more profitable than it is now.
Consequently, we explicitly confirm all of the financial projections for 2026 published in conjunction with our Polish acquisition, namely a return on tangible equity of about 19% and EPS uplift of more than 20%, which should bring us within striking distance of a net profit of EUR 4 billion and earnings per share of about EUR 10 already in 2026. This, ladies and gentlemen, concludes our presentation remarks. Thank you very much for your attention and we are now ready to your questions.
Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Questioners on the phone are requested to disable the loudspeaker mode while asking a question. Anyone who has a question may press star and one at this time. We have the first question coming from Gulnara Saitkulova from Morgan Stanley, please go ahead.
Hi, good morning and thank you for taking my question on the cost outlook. Can you elaborate a bit more on.
Your outlook when it comes to expenses.
are the main drivers of your costs in various markets for the next 12 months? Where and from which markets do you think most of the pressure could come from, and how do you think about IT investments as well as integration costs for the Polish unit?
Do you have any visibility there? Are there levers you can pull to maintain cost discipline if revenue soften?
Thank you.
All right, I would like to.
Split the answer as follows. First, I take the integration cost assumptions. Obviously, it's not easy to give a very precise number, but Peter and myself have been communicating this $150 million - $200 million overall integration costs for, let's say, the next 12 months - 24 months. That is covering, just to be very clear, the IT expenses that you have been mentioning. Of course, TSAs that we will be concluding together with our future Polish colleagues and our Spanish counterpart, and rebranding costs and so on. We will be in much more detail once we have closed the transaction and then give you a more detailed breakdown on where the costs exactly are rising, which are really integration costs, which are running costs, and so on and so forth. The ballpark number has not changed throughout the last two months and the close.
Let me see analysis in interaction with the colleagues in Madrid and Warsaw when it comes to the operating expenses running. First, I want to explain how do we get to the 5% confirmation. That's very simple. Look at the Q4 2024 print. This was, for various reasons that we explained back then, elevated. That's one of the reasons why on a year-on-year comparison, the 5% is still very much in reach. The second component, as you very well know, is always the FX volatility, depending on where finally, especially Euro/CZK, but also Euro/HUF and Euro will stand at the.
End of the year.
There is always room for ± 1% and we will flag that and explain in detail once we are there. On your point with regard to levels, let's be very clear, we have seen significant wage inflation all across our countries. That's also true for Austria. On the back of that, of course, the top line was very well supported in many areas. It's a mix that is, on the one hand, driven by the market, the broader market, the tight labor markets, which serve us extremely well on asset quality as well as on business performance. They come for a certain price and that you see in the cost line. Nonetheless, I want to add that we have used our very strong position to invest into our future on the technology side as well as on process optimization. We've always been flagging this at around 1.5 percentage points.
That's it. To sum it up and a little bit of a feeling for 2026, we'll certainly give by the end of October when we report on the 2020 on the cruise refix.
Thank you.
The next question comes from the line of Gabor Kemeny from Autonomous Research. Please go ahead.
Morning. My first question is on NII please. I noticed that most of the Q2 NII growth came from the savings banks and other segment. Can you elaborate a bit on the trends in the other segment please? Please note any possible thing confirmed if there are any non-recurring items impact. The other question on the NII is just going forward, shall we expect your NII to grow roughly in line with loan growth or are there any moving parts in your net interest margin you would like to call out? My final question will be on [ECITOM]. If we progress here in Q2, if you go to your 14.25% CET1 ratio target a year earlier, like by the end of this year, would you reconsider your up to 10% payout.
Target for this year?
Thank you.
All right. First, and very short and straightforward, what you see now, the roster is simply our positioning on the ALM side, pretty much hedging our downward, as to say, in the Austrian segments. As you know, we have an exposure to lower rates, and that's mainly positioned in what we see in Austria. Most of the business on the large corporate side has been going well; that's the NI drivers on other Austria on the capital. Look, Gabor, it's very simple. First goal is to achieve all the targets that we have been promising, A, to the market, and B, to the regulator. Once we are there, we will definitely reconsider our communication around capital return.
I do not consider a very high likelihood to change anything around the 2025 distribution, but when it comes to 2026 distribution, if things go in the direction that Peter has been describing in his summary, then certainly we will early enough start to think about how we can build an attractive capital return. That would be my answer at this point in time. Relatively low likelihood to change anything around the 2025 indications, but quite significant chances to have a very attractive capital return to 2026. I think that was the third part of the question, which I didn't hear. Sorry.
If I can squeeze in one more please. On the loan growth you are guiding 5%+ , you were running at 6% already in Q2. Can you elaborate on how far you think loan growth could accelerate in the next few quarters and which markets, segments do you expect to drive this? Thank you.
I think we are guiding for more than 5%. That would include 6.5%. That's the one. Secondly, I think what we have really seen, and I'm very honest with you, a little bit disappointed also on the positive side, was how quickly the mortgage lending came back. Now you will know as good as we do, you have to be a little bit careful with the % increases because if we grow 16% in Hungary or 13% in Croatia, that's great for what the colleagues are doing there. In the same moment on the group side, it doesn't move the % too much. Still, I would say the main driver, as it seems for the moment for even better growth, comes from the retail side.
Discussing with the corporate colleagues, we should have a solid growth, but maybe not, let me say, extraordinary one unless we see a better boost from the German investments. That's probably not yet arriving in Q3, Q4, but we see a good optimism for 2026 and for.
Good, thank you.
Central and Eastern Europe mortgage lending core business are the drivers of the upgrade.
Very clear again.
The next question comes online of Amit Ranjan from JP Morgan. Please go ahead.
Yes. Hi, good morning and thank you for taking my questions. I have two, please. The first one is on capital. You talked about some balance sheet optimization measures including securitization, hedging, etc., around 40 bps benefit. Did you take any measures during the quarter? Is all the 40 bps expected to come in the second half, please? The second one was again on capital, more than 18.25% at year end 2025. How does it compare to your expectation when you had announced the acquisition? Is it running ahead by how much? If you could give any indication. Then 14.25%—I thought it is 14.25%. Is the target greater than 14.25% or 14.25% for 2026? That would be the two questions. Thank you.
Okay, so I see two to three. Let me start with the capital, as you call it, balance sheet management optimization. First answer, pretty much nothing in so far this year in not include. We have used the time to prepare and we've started now in the third quarter to execute a little bit already. One part is that we are selling and making use of this extremely tight spread environment, making use of some activities on non-core business sales. This lightens up our RWA, so to say, position. The second element that we always have been flagging is our SRTs. We are very well progressing. We have been selecting portfolios.
There will be a couple of countries in Central and Eastern Europe and also an Austrian portfolio that we will market in the next couple of weeks and months, and we are very optimistic that we will achieve the goal of about 40 basis points effect, most of it probably this year, maybe a little bit of that depending on the approvals going into next year. Balance sheet management optimization so far has not been a strong element of the capital build, but will be a little bit more in the second half of the year 2025. On the 18.25%, it's very simple calculation. We said that we want to achieve a 13.5% plus consolidated CET1 ratio position as a minimum, which means we have a 4.6% drag from the inclusion in the consolidation that results in 18.1.
Meanwhile, we are absolutely confident that 18.25% is a very, very solid floor to what we are achieving. Of course, our goal is not to land at 18.25% exactly, but slightly higher. It's a little bit too early to say. We will see what we can update you on this one going into the Q3 reporting. Last but not least, 14.25% is going to be our new CET1 ratio management target in the course of the year 2026. That means that we want to achieve this level. Everything above we regard in principle as excess capital. Of course, you cannot steer it by the basis point, but that's the way you should look at it. We are not aiming for something substantially higher, but 14.25 % is the new CET1 ratio management target for the year 2026.
Thank you very much.
The next question comes from the line of Mate Nemes from UBS. Please go ahead.
Yeah, good morning. I have three questions please. The first one is just to follow up on RWA optimization. I hear you, Stefan. You said pretty much none of the 40 basis points was realized in the quarter. You did mention some balance sheet and RWA optimization. Could you quantify this specifically for Q2? How was this achieved? That's the first question. The second question would be on Austria and Austria deposits. Can you update us on the deposit beta in the country? How do you think about further repricing opportunity on deposits? Lastly, a question on loan growth. It's good to see corporate loan growth also accelerating.
I'm wondering if you can talk a little bit on what extent do you see already some pre-financing demand shaping up on the back of the German fiscal stimulus, that is, German corporates operating in Austria or in CEE and seeking investment type of loans, and also NEC suppliers, Austrian suppliers preparing for this. How does the pipeline look like and to what extent can we expect a meaningful acceleration in corporate loan growth, maybe slightly beyond the next two quarters? Thank you.
Yeah, good to hear you. First point can be straightforward, round about 5 basis points - 10 basis points, not more are there in the second quarter. I said already answering Amit's question before the only thing that we did very quickly after signing was reducing market risk RWAs. All the rest is on the future music meaning cool 3Q4 and also going into 2026 so 5 basis points - 10 basis points is a good, good proxy. Austrian deposit patterns, look, it really took a while but now in the second quarter you saw a substantial repricing not only in our books but also in the market and that will help also going forward. I think that with the ECB trajectory somewhere being either 2% until the end of the year or 25 basis points lower.
Let's see, we will be landing there on the deposit side in Austria so I can't give you a precise beta but deposits are pricing downwards. We have a lot of term deposits expiring still which will help to reduce our funding costs further. Of course, net interest income in Austria will not be reaching the 2023 levels but it's very much stabilizing and we are optimistic to beat our originally budgeted net interest in 2025.
Peter, on the last part of your question related to expectations in terms of corporate lending and volume growth, I think in a positive way we are somewhere a little bit in between. On the one hand, as Stefan before rightly mentioned, you know the biggest driver of our loan growth so far was retailing in the mortgage area, the consumer lending area. Having said that, what we have seen over the last quarter was a kind of pickup in the loan demand in the corporate area, especially in the last corporate area in the SME area which we highly appreciate. Is this related to the German bazooka? No, most probably not. What we have seen so far is the sentiment is improving. The overall mood of our clients is getting better because Germany is taking really tough actions, but we don't see so far in our numbers.
Again, coming back to what Stefan rightly mentioned before, in terms of loan growth and volumes we are quite optimistic when it comes to 2026. We are absolutely positive for the second half of the year. The impact of German bazooka we will see most probably in 2026 and 2027.
The next question comes online of Riccardo Rovere from Mediobanca. Please go ahead.
Thank you. Thank you very much for taking my questions. Two or three if I may. The first one is on NIM. You have 5% loan growth but you have zero or just above 0% NII growth in 2025. In the meantime, you have the deposit base which is growing good back. You are saying that within the deposit base you see 52% overnight, which is the stuff that costs you less. You have roughly 50% of your book which is fixed rate, 45% if I'm not mistaken. That is being repriced probably at higher rates today than when they were written four or five years ago. What do you need to see? What kind of spread compression do you need to see such gap between 5% or more than 5% loan growth and 0% NII growth in 2025?
Given the difference in how the funding mixes were shaping, do you think that is a remitting cycle? Talking about margin expansion is an abomination at this stage. That's my first question. The second question is for Alexandra. The corporate duration Stage 3 loans goes up by 0.8%, which from market relations, if I am not wrong, could account for roughly $30 million - $40 million in a quarter. The question is why did you need to increase the coverage by 0.8% - 44.6% when the level of NPL collateralization actually has gone up a little bit? Do you see that the increase in the Stage 3 coverage rate, though the disease spent in only one quarter, is a total one-off? Because if that is the underlying risk cost, it is not $97 million but it's much more similar to $60 million or so.
That may be a question also on the 20 basis points. The third question I have goes for Peter. Can you reassure us that with Santander Bank Polska your appetite for M&A is being satisfied for the next two to three years? Thanks for that.
May I start with the last part of the question about our risk appetite for M&A transaction? I fully confirm that our risk appetite for the next two to most probably three years is now somehow limited because we are now fully focused on integrating Santander Bank Polska, and I think our target to come up with a $4 billion net profit company is an ambitious one. We are quite convinced that we will succeed in 2026 to be there. In the meantime, we will still build up capital.
All right, on your NIM question, Riccardo, I think without being too long in addressing all the points that you were mentioning, first thing, obviously the loan growth that we are indicating is of course spread over the whole year. You cannot one to one translate the 5% into a better. Of course you know that. The other point is why was NIM going back up from Q1 to Q2? We were obviously also investigating it in very much detail. While the customer loans have been increasing on the back of some of the activities I mentioned on markets and other places, we have been reducing in other places interest-bearing assets, which of course then means that the average NIM on the total interest-bearing assets has been somewhat ticking up.
Our expectation for the end of the year on a broader range would be 2.3 - 2.45, could be 5 basis points up or down. What is very important is the medium-term outlook. On that one, I completely agree with you that on the medium-term perspective, as long as we can keep the spreads on both sides of the balance sheet at reasonably stable levels, then the loan growth of course has to translate into future NII. That's absolutely out of question. Let's not forget that we had very muted loan growth for quite a long time and that is not something that immediately translates into NII. We are registering a better NII assumption for 2025 already, but the real effect of the hopefully also sustainable better loan growth will only be there then in 2026 and forward.
Yeah. Hi, let me try now to address your questions. You rightly noted that the NPL coverage including collateral remained stable. This is also something that we are closely looking at. The change in the NPL coverage itself was very, very minor. As you surely know, NPL coverage level is a functional result of individual cases. If you have higher collateral, low loss provisions, and the other way around. I was mentioning in the presentation, we had these very few, and to be super precise, two cases, two larger cases in Romania where the level of collateralization was lower, so the NPL or the loan loss provision building was higher. To be honest, the change was so small I would not, if I was in your shoes, I would not interpret this too much.
We are very confident and very satisfied with the overall level of 72%-73% something for the year end. We expect roughly 75% or broadly stable with what we see today. The same is true for the NPL coverage including collateral, and what you somehow indicated that around 20 bps might be even lower. Around 20 bps. Please bear with us and allow for staying somewhat cautious as mentioned previously, and we all know the uncertainty around tariffs and macroeconomic environment is still a little bit fragile. We think with around 20 basis points.
We.
We show still prudent, but a good guidance for this cost.
If I may, just a quick follow-up on this, Alexandra. The EUR 480 million slides that you still have haven't been used very little in the quarter, if I'm not mistaken. At what point will you have to take a decision on this and how are you using part of it? You know, is this going to take another two, maybe three years, or at some point, maybe a year ahead, you will have to take a decision provided that tariff impact does not, you know, come up as, you know, too dangerous or too risky. What's the reason for using EUR 140 million a year, if I'm not mistaken? At this speed, if it takes, say, three years or so, four years or so, you know, to get rid of the EUR 480 million.
Let me come back to what we previously also, I think it was two calls ago, also commented. The reason why we took it down from EUR 190 million, then maximum EUR 190 million -EUR 140 million, still is or simply is the macroeconomic environment and the change in the Austrian, especially Austrian, macro economy. We are doing this FLI update, as you know, every quarter and as you rightly said, in Q2 the net result was very minor. We had some releases in Romania from the FLI updates, some pop-ups in Austria, overall disseminated to roughly EUR 6 million. We do it again in Q3 and in case the macroeconomic outlook in Austria will change for the better, which we do not know yet, this may result also in a positive development on FLI in Austria.
Overall, this is our current estimation, EUR 140 million overall release for this year driven by macroeconomic development mainly. We expect further releases next year and then we expect that we have reached a certain amount of floor in the FLIs of roughly EUR 300 million, which then will remain overall a basis for changes. This could go down a little bit, but this is what we expect to be the floor on FLI provision stock going forward. Not three to four years, this year and next year for P&L effective releases and then staying with stock of roughly EUR 300 million FLI.
Okay. Okay, thank you very much Alexandra. Thank you.
Next question comes from Ben Meyer from KBW. Please go ahead.
Hi. Yeah, morning everyone. Just a couple of quick ones for me. I was just interested to get the rate assumptions that your upgraded net interest income guidance is now based off. I think last quarter you're guiding to low double digit decline in Austria and about the evolution of the a bit more positive this year, this quarter. I was wondering whether you see perhaps a slightly softer decline in Austria this year on the analytics. Thank you. First of all.
Sure. First of all, rate assumptions at this point in time, we assume most of the key rates to hold flattish for the rest of the year. ECB assumptions, as you can read from the market forwards as well, is more leaning towards the 2% key rate for most of the remaining year and then further cuts, and even if they come very late, it will not change the picture for us at all. Czech National Bank is, from the perspective of our analysts, most likely going to cut one more time somewhere in Q3, Q4, but definitely not going below 3%. For the rest of the spectrum, you know about the Romanian situation and, in order to protect the currency and manage the overall budget situation, we don't expect too much of moves there. Maybe one cut. Let's see.
Overall picture is quite friendly for us in terms of key rates. I think you are following the whole sector and you see that this is quite supportive for banks. The other point on Austrian, and we have two effects there. The one we've described already in very much detail during the call. That's the deposit rebalancing, which is going very much in our favor both in savings banks and Erste Bank. I leave out now, I'm purely focusing on the core business. Of course, still on the other side, on the asset side for the remaining variable loan book, you will see repricings downwards. It's not going to be a walk in the park for the Austrian entities.
They will still have declines on the asset side NI and see when, so to say, this turning point comes where the volume growth can outpace the decline, most likely on the asset side not yet this year, but the deposit side is helping for all the other countries. I'm sure here we have a much better situation given the structure of the loan book. For example, Slovakia. I wasn't going into all the specifics today on the NI description, but what we see there is very nice. We see a very nice upward repricing of the loan book. Why? Because the mortgages typically have a duration of 5% refixing. There we see now the higher refixing from the formerly ultra low rate environment. You can be confident that also in the other Euro countries, we will see a very solid NI print in the forthcoming quarters.
Thank you.
Great, thank you.
The next question comes from the line of Benoît Pétrarque from Kepler Cheuvreux. Please go ahead.
Yes, good morning.
The first one is actually to.
Come back quickly on net interest income.
You are calling for flat NIM, 2.4% volume growth will continue.
Can we expect sequential improvement of net interest income going forward into 2025?
To come back on the guidance on kind of close to 0%.
NI growth, what prevented you to upgrade?
The guidance to just 1%, to be more precise? Basically, with a bit of sequential improvement of net interest income, you should get to 1%.
NI growth in 2025 without too much problem. The next question is actually on Polska. What do you have in mind on the earnings power?
Currently we've seen the Q2 reporting, we've seen some red developments in the quarter. Could you update us on the earnings power of Santander P olska.
Maybe just a final one on the day one CET1 ratio above the 13.5%. The buildup of capital is going extremely well.
Could we be close to the 14% level on day one, assuming closing in the fourth quarter?
Thank you. Very important.
Okay, now we're on. All right, let me try to cover those very quickly. First of all, to be very clear, thanks for the question. We are guiding for a name. We're not guiding for a name. It was just my indication. Where we believe we will be hoovering around, you know how sensitive this number is, it can be easily 10 pips lower or higher due to interest bearing, estimate volume and so on, so forth. One thing is very clear, and we've discussed it in answering the questions of other colleagues, one thing is very clear. Should we be able to confirm the loan growth that we are seeing at the moment also in the forthcoming quarters and the market spreads, let me say, develop neutral. That's enough.
Of course, the outlook, especially for the future years on the NI should be in the existing parameter, obviously quite, quite positive. That comes without saying, frankly speaking, I ask you for understanding whether I'm guiding for greater than 0% or 1% NI increase at this point in time. I hope this will not make too much of a difference. We will be as precise as possible in October when we talk about Q3, but for that today we simply have the guidance we will beat the 2024 NI. Everything else is a little bit, to be honest, that number crunching which we are not confident enough to give more precise. Santander P olska, obviously, and ask your understanding. We are not commenting on any details regarding the performance.
What we can say is that everything we have seen so far, all the stuff that is publicly available, but of course the conversations we have had with our Spanish and Polish colleagues is very, very positively giving us future confidence. Peter has already been mentioning we are very optimistic. We are looking forward to work also on the ground and in Poland after closing. That's all very much reconfirming, to say the least, all our assumptions. Last but not least, the simple answer is yes, it's possible. Of course it is possible that we will be close to 14% CET1 ratio. Whether it will be the end and be 13.83% or 13.92%, I have absolutely no clue. It depends on many things. It depends on the approval process of the SRTs, it depends on market swings. Yes, it is.
We have been saying basically with our today's indication that we will be, if you assume 18.25% - 460, will be higher than 13.65 and that also includes being close to 14. Thank you.
Right, thank you.
The next question comes from Krishnendra Dubey from Barclays. Please go ahead.
Thanks for taking my question. I guess just one small follow up on the NII. On the other revenue, on the other hand, that continues to be performing better. Like it was 2% of NII outcome, around 5%. If you could, if you could grind around, what are the drivers for that and how should I look at that part of NII?
Yes, as I said already, this is mainly a. In.
In. In.
There are many things in. The key matter, the key method that you see in other Austria is our investment book. On the one hand, I wouldn't use the word hedge. I was careful with this word because hedging is misused very often. Of course, it stands against the exposure that is rate sensitivity that we have on the Austrian entities in particular to downward shifts in Euro rates. That's the one part. The other part is, and we have been constantly reporting about that, that we still see an upward drifting return from our investment group. Not because we are increasing the volume so much. Volumes have been relatively constant over the last couple of quarters, but simply because the reinvestment yields are still slightly upward moving. That's true for the Czech Republic, that's true for Romania. There's also a particular network you see in other Austria.
Also still true due to the shape of the curve, steeper curve. It's also still true for the Austrian perimeter. In other words, holding. That explains the very good development on the other Austria book.
Sorry, small follow up. I was referring not to just other Austria. I was referring to the other division actually, which is like 119 in this quarter. It was like it continues to do well Q on Q and it was. It's up from 57 to 119. I was referring to other division, not other Austria.
Absolutely right. Other division. Thanks very much for clarifying. Thank you.
You're right.
The follow up question coming from line of Riccardo Rovere from Mediobanca. Please go ahead.
Thanks. Just a quick one. Can you please update us on what you think about bank taxes, bank levies in the various countries, please.
Talking about banking taxes.
We.
We don't expect during the second half of 2025 any changes. I think there has been already a lot of noise in the first part of 2025. The loss technically is increasingly often contributed. We don't expect.
The level that we are seeing today, we assume to stay more or less as it is next year.
Okay. There will be a slight increase in Romania, but in general it should stay roughly on this level where we are for this year.
Okay. This is valid, let's say 2026 and even 2027.
We should ask for business, not us. I think it's fair to say that our banking takes leverage higher than our cost because of.
As a reminder, if you wish to register for a question, please press star followed by one on your telephone. There are no more questions at this time. I would now like to turn the conference back over to Peter Bosek for any closing remarks.
Thank you so much for joining our call. We wish you a very nice August. We will be back on the 31st of October with our third quarter result. Thank you very much.
Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the call. You may now disconnect your lines. Goodbye.