BAWAG : April 26, 2021 - Transcript Q1 2021

BAWAG Group

BAWAG Group Preliminary Q1 2021

Earnings Call

26th April 2021 at 10:00 CEST

Transcription

Speakers:

Anas Abuzaakouk

Enver Sirucic

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Anas Abuzaakouk:Good morning everyone. I hope everyone is keeping well. I'm joined this morning as usual by Enver, our CFO.

Let's start with a summary of the first quarter results on Slide 3.

We delivered net profit of € 74 million, Earnings Per Share of

• 0.83 and a return on tangible common equity of 10.2% during the first quarter. On a normalized basis, taking into account the front-loaded first quarter regulatory charges of € 54 million, which equals 90% of full year regulatory charges, this would translate to net profit of €103 million and a Return on Tangible
  Common Equity of 14.3%.

The underlying operating performance of our business was strong with Pre-Provision Profits of € 179 million and a cost- income ratio of 40.5%. Total risk costs were € 29 million, of which € 13 million were general reserves. The ECL management overlay now stands at €56 million. We also decided not to release any credit reserves, although we see both an improved macroeconomic environment and continued positive developments across our customer base, in particular observing payment holidays falling to 40 basis points across our total customer business as well as decreasing NPLs. We will reassess the management overlay during the second half of the year once we've seen greater normalization of economic activity in a post-lockdown environment and hopefully a successful vaccine rollout across continental Europe.

In terms of loan growth and capital, we grew total customer loans and interest-bearing assets by 3% and 2%, respectively, quarter-over-quarter and 6% and 7%, year-over-year. We continued to accrete CET1 capital, generating 40 basis points of gross capital during the quarter. Our CET1 ratio was 14.2%, up 20 basis point from year-end 2020 after dividend deductions. As of first quarter and after deducting all current dividend commitments totaling € 457 million, we have additional excess capital of € 382 million versus our target CET1 ratio of 12.25%

In terms of dividend distributions in the first quarter, we made the initial down-payment of € 40 million on the total € 460 million earmarked dividend from 2019 and 2020 profits. Our plan is to pay the remaining € 420 million in the fourth quarter 2021, subject to shareholder and regulatory approvals.

Additionally, we signed the acquisition of Depfa bank during the first quarter, which is expected to close in the second half of the year and will be capital accretive Day 1 with no impact on our capital distribution plans. The acquisition is more of a run-off portfolio purchase comprised of a handful of high-quality low margin assets in the form of government bonds as well as covered bond liabilities. The goal is to expedite the existing

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wind-down of the bank leveraging our operations and existing infrastructure.

In terms of 2021 targets, despite the impacts from the various lockdowns so far in the first four months of the year, we're off to a strong start and feel good about delivering our targeted return on tangible common equity of greater than 13% and cost- income ratio under 41%. We also feel good about delivering a return on tangible common equity of greater than 15% and cost- income ratio of under 40% in a normalized environment, which from today's perspective looks like a 2022 event.

Moving to slide 4: Net profit was € 74 million for the quarter, up 20% versus prior year. Overall, strong operating performance with operating income of € 301 million and total expenses of € 122 million, up 2% and down 3% respectively, versus prior year. Total Pre-provision profits were € 179 million, up 5% versus prior year. Risk costs were € 29 million, down 47% versus prior year and reflecting the gradual normalization of risk costs. Regulatory charges were € 54 million, up 49% versus prior year related to two factors: increased deposit insurance costs tied to the Commerzialbank fraud last year and an increase in deposit contributions stemming fromincreased overall deposits in the system. As stated, first quarter charges represent 90% of total estimated regulatory charges for the year. Tangible book value per share was €32.62, up 7% versus prior year and flat versus prior quarter. This assumes the deduction of the remaining

• 420 million of earmarked dividends as well as the first quarter
  2021 dividend accrual of € 37 million.

Moving on to slide 5, at the end of the first quarter, our CET1 ratio was 14.2% after deducting the remaining earmarked dividends from profit reserves of € 420 million and deducting the first quarter 2021 dividend of € 37 million. We are fully committed to distributing the remaining earmarked dividends of

• 420 million, as we look to honor commitments to shareholders and believe the bank's continued resilience and overall strong capital levels position us well to resume ordinary capital distributions. From today's perspective, we anticipate this is a fourth quarter event.

For the quarter, we generated 40 basis points of gross capital and continue to consistently generate significant amounts of capital, averaging over 220 basis points annual gross capital generation over the past four years. As of first quarter and after deducting all dividend commitments, we have excess capital of

• 382 million versus our target CET1 ratio of 12.25% and stand at approximately 500 basis point buffer to our SREP of 9.14%. To the extent that we are unable to deploy our excess capital in organic growth or M&A, we will distribute capital to shareholders

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through share buybacks and/or special dividends on an annual basis in a normalized environment.

Lastly, we wanted to reaffirm our position related to the City of Linz legal case in light of the recent negative ruling from the Court of second instance. To recap, we have already fully provisioned the City of Linz from a capital standpoint last year, having provisioned the receivable through the use of CET1 capital prudential filters. We continue to feel strongly about the merits of our legal case and look forward to the case now being taken up by the Austrian Supreme Court. The current case revolves around contract validity and does not address any potential damages that BAWAG may pursue.

On slide 6, our Retail & SME business delivered net profit of

• 67 million, up 19% versus the prior year and generating a very strong return on tangible common equity of 22% and cost- income ratio of 40%. Average assets for the quarter were € 19.6 billion, up 8% versus prior year and 2% versus prior quarter, driven by growth in housing loans across our core markets.
  Average customer deposits were € 25.4 billion, up 6% versus prior year and 2% versus prior quarter. Pre-provision profits were € 135 million, down 5% compared to the prior year, with operating income down 3% as we still see customer activity impacted by lockdowns. Overall operating expenses were down 1%, resulting from prior year operational initiatives with a continued focusing on driving synergies across our various channels and products. Risks costs were € 15 million, reflecting a gradual normalization of risk costs without any credit reserve releases. The trend in asset quality continues to improve across our customer base, with payment holidays at 60 basis points as of the end of the first quarter (versus 1.2% at year-end) with a customer payment rate of 89% on all expired deferrals with an average of 7-months. Additionally, 78% of all customer loans that are either in active deferral or non-paying after deferral expiration, are already captured in stage 2 or stage 3 loans.

We've continued to execute on our various operational and strategic initiatives. We expect to see continued average asset growth and efficiency gains across the Retail & SME franchise as well as a shift to a greater percentage of secured housing loans for the balance of the year. We also expect the second quarter to look very similar to the first quarter given the existing lockdowns, however, we anticipate a normalization of customer activity in the second half of the year.

On Slide 7, our Corporate and Public business delivered net profit of € 25 million, up 9% versus the prior year and generating a solid return on tangible common equity of 12% and a cost- income ratio of 25%.

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	Average assets for the quarter were € 13.8 billion, up 5% versus
	prior year and flat versus prior quarter, driven primarily by
	growth in the public sector business. Pre-provision profits were
	€ 56 million, up 13% compared to the prior year. Risks costs
	were € 15 million, comprised of € 13 million general reserves
	with no reserve releases taken. The trend in asset quality
	continues to improve with all payment holidays at 10 basis
	points and a 100% paying ratio for customers that took up
	payment holidays over the last year. Also, NPLs were down but
	we continued to increase reserves through management
	overlays. On the whole, we have been pleasantly surprised with
	how our customers have responded and the overall credit
	performance of the business.
	We continue to see solid and diversified lending opportunities
	as well as a greater normalization of customer activity. We will
	continue to maintain our disciplined underwriting, focus on risk-
	adjusted returns, and avoid blindly chasing volume growth.
	With that I will hand over to Enver.
Enver Sirucic:	Thank you, Anas. I will continue on slide 9: Overall solid results
	in the first quarter … stable development of core revenues with
	lower net interest income due to day count and continued
	improving trend in net commission income, compared to prior
	year core revenues were actually up 2%. Underlying operating
	expenses further came down as well as risk costs without
	releasing any credit reserves. Regulatory charges were up
	almost 50% versus prior year related to increased deposit
	insurance costs tied to the Commerzialbank fraud and
	increasing contributions stemming from increased overall
	deposits in the system.
	On slide 10, an overview of our balance sheet … we saw a
	growth in customer loans of 3%, offsetting lower securities and
	bonds, which resulted in average interest-bearing assets, total
	assets and risk weighted assets remaining largely stable versus
	year-end … on the funding side we continued improving our
	long-term funding profile thru issuing a 500m 20yr covered bond
	in March at mid-swap + 4 basis points.
	On slide 11, core revenues. Net interest income down 2%
	versus Q4 '20 due to day count with a stable net interest margin
	of 228 basis points, in line with Q4 '20. We still see an overall
	positive trend resulting from higher interest-bearing assets in
	prior quarters and consistent with prior quarters we expect our
	asset mix to change into more secured lending. In terms of net
	commission income, it was up 5% versus fourth quarter and we

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