BAWAG Group AG (BG) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the BAWAG Group Q3 2026 Results Webcast and Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded, and there will also be a transcript on the company's website. I would now like to hand the conference over to your first speaker today, Jutta Wimmer, Head of Investor Relations. Please go ahead.

Good morning, everyone. Before we start with the call, let me remind you of the following: In regards of the planned transaction of Permanent TSB, we remind that, that transaction is regulated by the Irish takeover rules, and therefore are restricted in information we can provide on this call. As a result, we will not take Q&A in relation to the PTSB transaction, and any updates will be communicated by regulatory announcements. With that, I hand over to our CEO, Anas Abuzaakouk.

Thanks, Jutta. I hope everyone is doing well this morning. I am joined by Enver, our CFO. Let us start with a summary of third quarter results on Slide 3. We delivered net profit of EUR 248 million, EPS of EUR 3.18, and a return on tangible common equity of 27% during the third quarter. The operating performance of our business was very strong with core revenues of EUR 599 million, up 8% versus prior year, pre-provision profits of EUR 425 million and a cost-income ratio of 30%. We continue to realize the benefits of investments over the years as we build out a pan-European and U.S. banking group. Total risk costs were EUR 79 million, translating into a risk-cost ratio of 56 basis points. We have a low NPL ratio of 1% and continue to see solid credit performance across our businesses. In terms of our balance sheet and capital, average customer loans were flat and average customer funding was down 1% quarter-over-quarter. We have a fortress balance sheet with EUR 13 billion of cash equal to approximately 19% of our balance sheet, an LCR of 197% and overall strong asset quality. During the first 3 quarters of the year, we worked diligently to ensure we positioned ourselves to fully self-fund the PTSB transaction. As of the third quarter, we landed on a CET1 ratio of 17.1%, translating into over EUR 1 billion of excess capital required to self-fund the deal. We have invested considerable time and resources in the PTSB transaction, and we look forward to the upcoming High Court decision at the end of the month and receipt of the remaining regulatory approval. We started this process in November of 2025, when we made a strategic decision to enter the announced public auction. We spent 6 months of due diligence as part of a competitive auction process that required thorough analysis, planning and coordination, and we were pleased to emerge from that process as the successful bidder. After the signing of the transaction and subsequent shareholder approval in July, we have spent a significant amount of time communicating with regulators, the PTSB Board and leadership team, and many other stakeholders introducing ourselves and our business. Our goal has been to listen, learn and prepare for a smooth and seamless integration. We are confident in having put our best foot forward, being patient, staying disciplined, working constructively and transparently at every stage of the process, all while rising above the noise. If the PTSB transaction is approved, this will be our 15th acquisition since 2015. Acquisitions are a key plank of our strategy as we continue to build a pan-European and U.S. banking group with the capabilities and scale to effectively compete and deliver sustainable results long into the future. PTSB would be our first public company acquisition with different dynamics, but always stay consistent to our principles. We focus on delivering results through our actions and avoiding empty slogans and self-promotion, as our actions speak louder than our words. We have been consistent about our views of the Irish market and key focus. Ireland is 1 of the most attractive markets across Europe, with all the ingredients for successful banking, pro-growth economic policies, rich in human capital, and a bridge to the EU, the U.K. and the U.S. We aim to drive competition through significant investment and innovation, supporting PTSB's customers and more broadly, the Irish economy, while delivering long-term sustainable growth. We are excited to get to work and embrace the journey ahead. We will provide an updated midterm outlook with full year earnings, assuming a successful close of the PTSB transaction. Excluding any potential PTSB impact, we reconfirm all of our 2026 targets with net profit over EUR 960 million, return on tangible common equity over 20% and a cost-income ratio under 33%. Moving to Slide 4. As far as capital development, our reported CET1 ratio landed at 17.1%, equal to over EUR 1 billion of excess capital above our CET1 target of 12.5%. This puts us in a position to fully self-fund the PTSB acquisition, which requires approximately 450 basis points of capital, subject to high court and regulatory approvals. We generated 116 basis points of gross capital from earnings during the third quarter. RWA growth accounted for approximately 30 basis points of capital, reflecting the changing asset mix and growth in our consumer and SME business, which has been on a positive trajectory in the past few quarters. We also restarted our dividend accrual, accruing 100% of earnings in the third quarter equal to EUR 248 million of net profit or EUR 3.21 per share, and plan to do the same for the fourth quarter as well. With that, I'll hand it over to Enver.

Thank you, Anas. Moving to Slide 6, our P&L and balance sheet overview. We delivered a strong third quarter with net profit of EUR 248 million and a profit before tax of EUR 335 million. Net profit was down 3% versus prior quarter due to a positive tax effect in the second quarter following a participation sale, while profit before tax was up 1%. Return on tangible common equity was 27% based on a current CET1 ratio of 17.1%. Core revenues amounted to EUR 599 million, up 8% versus the prior year and 2% versus prior quarter, while pre-provision profit reached EUR 425 million. The cost-income ratio was below 30% with synergy gains materializing faster than anticipated. Risk costs amounted to EUR 79 million, translating into a risk cost ratio of 56 basis points, reflecting the changing asset mix. Underlying credit performance remained solid with an NPL ratio of 1%. Earnings generated 116 basis points of gross capital during the third quarter, supporting a reported CET1 ratio of 17.1%. We also resumed the dividend accrual at 100% of third quarter earnings, which is already deducted in the CET1 ratio. In terms of balance sheet, average customer loans were flat and average customer funding declined by 1% quarter-over-quarter. We continue to maintain a fortress balance sheet with EUR 13 billion in cash, representing 19% of total assets and an LCR of 197% and a strong asset quality. Moving to Slide 7. Core revenues. Net interest income increased by 2% in the quarter with customer loans flat in Q3 '26 and supported by continued positive trend in consumer SME, including credit cards. Mortgage volumes remained subdued. Net interest margin at 350 basis points reflect the ongoing changing asset mix, while the deposit beta decreased to 28%. NII rate sensitivity is unchanged. Every 25 basis points increase delivers EUR 25 million per year after 12 months and EUR 50 million per year after 24 months. Net commission income with a stable development at EUR 102 million results across business lines of retail SME continued to perform well. For the fourth quarter, we expect net interest income to grow gradually and a stable development in net commission income. On Slide 8, operating expenses amounted to EUR 181 million, representing a 2% quarterly decline with a cost-income ratio below 30%. Our initiatives across the group developed better than anticipated, therefore expect to outperform our outlook. Risk cost for the quarter came in at EUR 79 million, up EUR 3 million versus prior quarter. The increase reflects continued shift in asset mix toward higher-margin consumer and unsecured lending. Importantly, underlying credit performance remained strong with an NPL ratio of just 1%. On Slide 9, the retail SME segment delivered net profit of EUR 218 million, a return on tangible common equity of 35.8%. Pre-provision profits amounted to EUR 379 million, 4% higher than the previous quarter. Risk costs amounted to EUR 75 million or 77 basis points, driven by the asset mix change, while credit quality remained solid with an NPL ratio of 1.6%. We expect continued growth across the franchise. On corporate real estate public sector, the segment delivered net profit of EUR 35 million with a return on tangible common equity of 23.2%. We saw more redemptions in the quarter, but our focus remains unchanged on disciplined underwriting and risk-adjusted returns. Finally, on Slide 10, we are entering the last quarter of the year. Profitability remains robust, capital generation continues to be strong, asset quality is resilient, and we remain on track to deliver our 2026 targets, while preparing for the next phase of growth through the planned acquisition of PTSB. And as mentioned earlier, we'll provide updated midterm targets with our full year results in February. And with that, operator, let's open the call for Q&A. Thank you.

[Operator Instructions] And your first question today comes from the line of Gulnara Saitkulova from Morgan Stanley.

The first question on the deposit momentum and NII. Can you please unpack the key drivers behind the deposit outflows with the corporate real estate and public sector down 26% year-on-year and retail and SME down 2%, and where you see the most intense competition across products and geographies for the deposits. And looking ahead, where do you expect the deposit volumes to stabilize by segment? And how should we think about the pricing trends across key products? And related to that, to what extent can the shift towards higher-yielding lending offset funding pressures and support NII growth? And when should we expect the benefits from this asset mix shift to become visible in NII? And the second question on risk-weighted assets. How should we think about the risk-weighted assets growth relative to organic growth going forward, particularly as the portfolio shifts towards high-risk assets? Do you expect the resulting capital headwinds to persist going forward? And what levers could you pull to mitigate the impact on capital generation?

Okay. Great. Gulnara, that was a lot to digest.

Yes, let me take the first one. I think you asked about the deposits momentum and the outflows. So more of the same that we have seen in the past. It's mainly 2 products. One is the online German deposit business. We decided a few quarters ago not to compete in the market, because we think it's overpriced and we are still seeing outflows in that segment. And the second one is the Austrian public sector deposit base where the competition comes from the Austrian Bundesschatz, so the government offer, which is, again, above. That's why we decided not to compete. But all the other franchises, all the other deposits are quite stable or growing. You asked about stabilization. Well, I think once that normalizes, but we see already lower outflows compared to the prior quarters in that segment. I think the second block of questions was about asset growth, I guess, and also RWAs. Is that right, Gulnara?

Yes. Correct. So if you look about the moving parts of NII, to what extent the shift towards high-yielding lending to unsecured lending can offset these funding pressures and support the growth?

Yes. So I think on the consumer SME side, we'll see that trend continuing. It was quite stable over the last couple of quarters. And what is harder to predict now is mortgages. We did expect more growth this year, but competition was really very intense in terms of pricing levels. That's why we stayed very patient, and that's why you see a small decline there. And also in Q3, we had more redemptions in the non-retail segment, especially on the real estate. Again, it depends on the overall market. And for us, nothing changes. We will be disciplined and we will not chase volumes in a particular quarter, but look at it from a long-term perspective.

And when it comes to risk-weighted assets?

Well, it will grow in line with the asset development. And the only thing that we have not disclosed is obviously that we are working on different measures, including SRTs to potentially offset these.

So you don't expect these headwinds to persist going forward, the 30 basis points headwind that we saw from the mix shift. So you expect this to phase out essentially to not persist going forward?

No, it's the same. So as long as we have that asset mix change, you will see higher front book RWA density, obviously, given the mix of the assets. The only thing I said is we will work on different measures to offset that RWA growth, and that's not reflected in Q3 and might be different in the coming quarters.

Your next question today comes from the line of Amit Ranjan from JPMorgan.

I have 2, please. The first one is on risk costs. How should we think about the 50 bps outlook for '26? You have 56 bps during the quarter, 52 bps year-to-date. Can you talk about the drivers here? I think you mentioned solid underlying trends. So anything that you can give, split between asset growth and Stage 3 coverage provision build? And the second one is on costs, please. You are running well ahead. Should we expect this trend to continue? Anything seasonal that we should keep in mind for Q4 that could drive the number higher, please?

Thanks, Amit. On the risk cost outlook, pretty much the same answer as I gave to Gulnara is, as long as we see that asset mix change going on, you will see higher risk cost ratio. What is hard to predict is the redemption profile if you see earlier redemptions than expected, as well as the mortgage growth, which was more muted than what we expected, which then becomes a technical thing of denominator. And if you then look at the risk cost ratio, it might be a bit elevated. I think we are still confident that we'll be around the 50 basis points for the full year. And on OpEx, yes, I think trend is very obvious. Q3 lower than Q2. It should be quite stable for Q4, I would assume, and we don't expect any one-offs or any seasonal effects for Q4.

Your next question today comes from the line of Máté Nemes from UBS.

Two of these, please. The first one would be on your cash balances. I was just wondering if you could update us on potential deployment of cash into higher-yielding securities. I think you've been feeling uncomfortable with the spread environment. Now they've seen some spread widening clearly. Any updated thoughts on that? What's holding you back? What can hold you back from larger deployment going forward? And the second would be just a quick update on your lending pipeline on non-retail. I hear you it's hard to predict redemptions or repayments. But if you could just talk a little bit about opportunities, particularly in corporate lending and also perhaps in real estate, what you're seeing in the market at the moment.

All right. Thanks, Máté. Cash deployment, we are seeing the spreads starting to widen across certain asset classes. Obviously, sovereign, I think is first and foremost, which we have almost no exposure, it's pretty de minimis, under 1%. But that's been the case for a number of years. I think we'll be patient. There's a lot going on. We see some areas that we think could be attractive, but we're going to be disciplined and patient and just assess the overall market as we think risk is repricing generally across the board. And that's something, hopefully, we'll be able to be the beneficiaries of as we've been patient for a number of years now. And then on the non-retail, I think it's a good question. The reality is you see a pipeline build up. In those times, you see pretty fast redemptions that are unexpected, and that's one that we just got to be patient. We're not going to manage it by quarter in terms of volume growth. We feel pretty good about the pipeline that we have going into the end of the year, but that's just cyclical. To be quite frank, it's hard to pinpoint in any given quarter, let alone, I guess, across the whole year. But we'll be patient. We see some good opportunities, but we're never going to chase anything for the sake of volume growth.

Your next question today comes from the line of Gabor Kemeny from Autonomous Research.

Firstly, on the NII outlook, please. I mean you commented on the deposit flows. How much competitive pressure do you see on deposit spreads? And looking at your NII sensitivity guidance, I guess, how much offset can we possibly assume from deposit spreads drifting a bit from the current levels, limiting the upside from higher rates? That's the first one. And then secondly, coming back to costs, I mean, you keep beating on consensus and on expectations. Can you comment on what levers have you found to improve the cost efficiency? And is this kind of fully in line with your budget? Or are there any trends which have been more supportive than you assumed initially?

Yes. So Gabor, on deposit competition, I mentioned the 2 examples. So we have seen quite an intense market in Germany, especially for the online deposits as well as the Bundesschatz offer in Austria. Overall, we would assume that the competition will pick up. If you look at it differently, what we have seen early days is not so much the deposit pricing that has picked up other than a few offers that you see in the market, but it translated into much higher mortgage pricing intensity. So the mortgage spreads dropped significantly over the last couple of months, which we think is a reflection of the higher deposit margins that we see on the other side. But going forward, yes, we would expect more intense competition in the market overall.