BAWAG : Transcript H1 2021

BAWAG Group

BAWAG Group Q2 2021

Earnings Call

26th July 2021 at 10:00 CEST

Transcription

Speakers:

Anas Abuzaakouk

Enver Sirucic

1

Anas Abuzaakouk:	Good morning everyone. I hope everyone is keeping well and
	enjoying the summer months. I'm joined this morning by Enver,
	our CFO.
	Let's start with a summary of the second quarter results on slide
	3. We delivered net profit of € 119 million, earnings per share of
	€ 1.34 and a return on tangible common equity of 16.3% during
	the second quarter. The underlying operating performance of
	our business was strong with pre-provision profits of € 181
	million and a cost-income ratio of approximately 40%. Total risk
	costs were € 24 million, with the ECL management overlay now
	at € 70 million. We continue to not release any credit reserves,
	although we see a substantially improved macroeconomic
	environment from earlier in the year and continued positive
	developments across our customer base, in particular observing
	payment holidays falling to 20 basis points across our total
	customer business. We will reassess the management overlay
	during the second half of the year once we've seen greater
	normalization and stabilization of economic activity.
	In terms of customer loan growth and capital, average customer
	loans were stable quarter-over-quarter and up 3% year-over
	year. We continued to accrete CET1 capital, generating 60
	basis points of gross capital during the quarter. Our CET1 ratio
	was 14.4%, up 40 basis points from year-end 2020 after all
	dividend deductions. As of second quarter, and after deducting
	all current dividend commitments totaling € 515 million, we have
	additional excess capital of € 436 million versus our target CET1
	ratio of 12.25%.
	In terms of dividend distributions, we still have our earmarked
	dividend of € 420 million from 2019 and 2020 profits, which have
	always been deducted from CET1 capital and remain in profit
	reserves. Our plan is to pay the outstanding 2019 and 2020
	dividend of € 420 million (or € 4.72 per share), subject to
	shareholder approval at the AGM on August 27, now that the
	ECB recommended dividend ban has been lifted, sometime in
	early October.
	In terms of 2021 targets, given the strong business performance
	during the first half of the year, the improving macroeconomic
	environment we're witnessing, and the continued improvement
	in credit quality across the business, we are upgrading our
	targets for the full year. We now expect to deliver a return on
	tangible common equity of approximately 15% and a
	cost-income ratio around 40% this year.

2

On the M&A front, we signed the acquisition of Hello bank! Austria last week. Hello bank! Austria is the leading online retail brokerage platform in Austria and allows us to bolt-on an online brokerage product to our existing easybank offering, adding 80,000 new customers, which fits in nicely with our overall Retail

• SME offering. We also expect the DEPFA Bank acquisition we signed during the first quarter, which is capital accretive Day 1, to close in the second half of the year. Both deals will have no impact on our overall capital distribution plans. I'll provide more details on both acquisitions later in the presentation.

Given the recent lifting of the ECB recommended dividend ban and the scheduling of our AGM for late August, we've decided to move up our investor day to September 20, 2021. We plan to share updated financial targets and will provide a new 4-year plan through 2025. We also plan to release the results of our stress test on July 30, shortly after the release of stress test results from the regulators.

The past 16 months have been incredibly challenging and not without adversity; testing our collective patience and resolve. However, the COVID-19 pandemic truly highlighted the quality, resilience, and sustainability of our franchise. With everything we've gone through, the team is more excited than ever to address the many opportunities ahead of us.

Moving on to slide 4: We delivered net profit of € 119 million, up 94% versus prior year. Overall, strong operating performance with operating income of € 303 million and total expenses of € 121 million, up 6% and down 3% respectively, versus prior year. Total pre-provision profits were € 181 million, up 14% versus prior year. Risk costs were € 24 million, down 68% versus prior year and reflecting the normalization of risk costs. Tangible book value per share was € 33.38, up 5% versus prior year and 2% versus prior quarter. This assumes the deduction of the earmarked € 420 million from 2019/2020 profits as well as the first half 2021 dividend accrual of € 95 million.

Moving on to slide 5, at the end of the first quarter, our CET1 ratio was 14.4% after deducting the remaining earmarked dividends from profit reserves of € 420 million and deducting the first half 2021 dividend of € 95 million. We look forward to finally 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 going forward.

For the quarter, we generated 60 basis points of gross capital as we continue to consistently generate significant amounts of

3

capital, averaging over 220 basis points annual gross capital generation over the past four years. As of second quarter and after deducting all dividend commitments, we have excess capital of € 436 million versus our target CET1 ratio of 12.25% and stand at 528 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 through share buybacks and/or special dividends on an annual basis in a normalized environment as part of our ordinary capital distribution plans.

On slide 6, a recap of the two M&A transactions signed this year. We signed the acquisition of Hello bank! Austria last week and are excited about the team joining, the business, and the many opportunities ahead of us. Hello bank! Austria is the leading online retail brokerage platform in Austria and allows us to bolt- on a brokerage product to our existing easybank platform, adding 80,000 new customers, which fits in nicely with our overall Retail & SME product offering. The deal is expected to close in the fourth quarter of this year or first quarter of 2022. We underwrote the deal to an RoTCE greater than 15% and will have a Day 1 impact on our CET1 ratio of low double digit basis points. The deal will add over € 10 million pre-tax profit post- transformation.

We also expect the DEPFA bank acquisition, which we signed during the first quarter, to close during the second half of the year. The DEPFA transaction represents an accelerated operational wind-down of DEPFA bank leveraging BAWAG's operational capabilities and infrastructure, while taking little to no credit risk. The deal is capital accretive with a Day 1 gain of over € 60 million, which will in turn be reinvested to accelerate our business transformation.

Both deals will have no impact on our overall capital distribution plans. More details will be provided during our investor presentation as part of our 4-year business plan.

On slide 7, our Retail & SME business delivered net profit of € 94 million, up 40% versus the prior year and generating a very strong return on tangible common equity of 25% and cost-income ratio of 38%. Average assets for the quarter were

• 20.1 billion, up 10% versus prior year and 2% versus prior quarter, which is driven by continued growth in housing loans and a pick-up in consumer loans. Average customer deposits were € 26 billion, up 7% versus prior year and 2% versus prior quarter. Pre-provision profits were € 141 million, up 12% compared to the prior year, with operating income up 6% as we begin to see a gradual normalization of customer activity. Overall operating expenses were down 4% versus prior year,

4

resulting from prior year operational initiatives with a continued focus on driving synergies across our various channels and products. Risk costs were € 15 million, down 58% versus prior year, 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 30 basis points as of the end of the second quarter (versus 1.2% at year-end) with a customer payment rate of 90% on all expired deferrals with an average of 9-months. Additionally, 87% 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 half of the year to look very similar to the second quarter with normalization of customer activity continuing in the months ahead.

On Slide 8, our Corporates & Public business delivered net profit of € 35 million, up 149% versus prior year and generating a strong return on tangible common equity of 16% and a cost- income ratio of 22%. Average assets for the quarter were € 13.4 billion, down 4% versus prior year and 2% versus prior quarter, driven primarily by lower corporate and public sector cash advances as well as delayed funding on several loan commitments. Pre-provision profits were € 58 million, up 21% compared to the prior year. Risks costs were € 10 million, down 65% compared to prior year, reflecting positive developments across our customer base with no reserve releases taken as well. The trend in asset quality continues to improve with payment holidays at 10 basis points and a 100% paying ratio for customers that took up payment holidays over the last year. We've 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 and several commitments funding in the second half of the year. 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.

5