BAWAG Group (BAWAG), a prominent banking group, announced its third-quarter results for the year 2024, highlighting a net profit of €178 million, with earnings per share (EPS) of €2.25 and a robust return on tangible common equity (ROTE) of 24%. The tangible book value per share saw a year-over-year increase of 16%, reaching €38.48.
Following the European Central Bank’s approval for the acquisition of Knab, BAWAG has raised its full-year profit before tax target to over €950 million, incorporating two months of Knab’s contributions. The company also increased its CET1 ratio target to 12.5% and anticipates a pro forma CET1 ratio of over 14% by the end of the year.
Key Takeaways
- BAWAG Group reported a Q3 net profit of €178 million, EPS of €2.25, and a ROTE of 24%.
- The ECB approved the acquisition of Knab, leading to an increased full-year profit before tax target of over €950 million.
- CET1 target raised to 12.5%, with a pro forma CET1 ratio of over 14% expected by year-end.
- Net interest income declined slightly by 1% to €304 million, while net commission income rose by 1%.
- The U.S. office portfolio decreased by 30%, with a focus on asset recovery and strategic management.
Company Outlook
- BAWAG maintains a cautious outlook amid rising interest rates but expects earnings growth from solid operational performance.
- An Investor Day is planned for March 4, 2025, to discuss potential capital distributions and strategic developments.
- The company projects net interest income growth for the remainder of 2023 and into 2025, despite minor NIM compression.
Bearish Highlights
- Net profit for the retail and SME segment decreased by 4% year-over-year.
- The Corporates, Real Estate, and Public Sector segment also saw a net profit decline of 6%.
- Net interest income experienced a slight decrease due to lower business volumes and increased deposit betas.
Bullish Highlights
- Pre-provision profits reached €265 million, with a cost-to-income ratio of 32%.
- Total risk costs were low at €25 million, resulting in a risk cost ratio of 25 basis points.
- The company has a stable liquidity position, with customer funding at €46.2 billion and cash at €15.6 billion.
Misses
- The company reported a slight decline in net interest income, attributed to lower business volumes and deposit betas rising from 32% to 35%.
Q&A Highlights
- Management discussed future lending opportunities, maintaining a conservative credit approach, and a robust pipeline in corporate and public sector segments.
- Executives expressed confidence in the stable cash flows and the recovery of the U.S. office market.
- Enver Sirucic addressed the impact of ECB rate reductions and the company’s significant cash position in anticipation of M&A activities.
- Chris Hallam from Goldman Sachs inquired about the increase in betas, which was clarified to be driven by reference rates rather than customer yields.
In conclusion, BAWAG Group’s third-quarter earnings call reflected a company that is managing its assets prudently while pursuing strategic growth opportunities. With the approval of the Knab acquisition and a cautious but optimistic outlook for the future, BAWAG is positioning itself for continued success in the banking sector.
Full transcript – None (BWAGF) Q3 2024:
Operator: Good day and thank you for standing by. Welcome to the BAWAG Group Q3 2024 Results Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Anas Abuzaakouk, CEO. Please go ahead.
Anas Abuzaakouk: Thank you, operator. I hope everyone is doing well this morning. I’m joined by Enver, our CFO. Before we jump into 3Q results, I’m happy to announce that we received ECB approval for the acquisition of Knab in the Netherlands last Friday. We’re excited about welcoming the team, rolling out the integration plans and pursuing the many opportunities ahead of us. As for third quarter results, let’s start on Slide 3. We delivered net profit of €178 million, EPS of €2.25 and a return on tangible common equity of 24% during the third quarter. Tangible book value per share was €38.48, up by 16% versus prior year and up 3% versus prior quarter. The operating performance of our business was very strong with pre-provision profits of €265 million and a cost to income ratio of 32%. Total risk costs were €25 million, translating into a risk cost ratio of 25 basis points. We utilized €10 million of our management overlay with the remaining ECL management overlay of €70 million. We have a very 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 down 2% and average customer deposits were up 1% quarter-over-quarter when excluding the sale of our German Bausparkasse business. Our CET1 ratio landed at 17.2%, up 70 basis points from prior quarter after considering the year-to-date dividend accrual of €286 million. We have increased our CET1 target to 12.5%, up 25 basis points and adjusted our capital distribution threshold to 13% for the years 2024 and 2025. In light of our 2 strategic acquisitions this year, we have made adjustments to our capital framework given several moving parts that I will address on the next slide. We have a fortress balance sheet with €15.6 billion of cash, equal to almost 28% of our balance sheet, an LCR of 260% and overall strong asset quality. We’re starting to see a pickup in customer activity across the franchise, albeit customers continue to remain cautious as they adjust to new normal of higher rates. Given the recent approval of the Knab acquisition, we are increasing our full year profit before tax target to over €950 million to account for 2 months of the Knab acquisition. We are also on track to deliver a full year return on tangible common equity of greater than 20% in a cost to income ratio under 34%. The two acquisitions of Knab and Barclays Consumer Bank Europe will consume approximately €500 million of excess capital, and we forecast to generate over €250 million of pretax profit by 2027. Therefore, we are targeting a year-end pro forma CET1 ratio of greater than 14% and excess capital of greater than €200 million. The first three quarters of the year have been defined by M&A and integration planning, ensuring constant dialogue with the businesses, our regulators and laying out detailed integration plans. There has been a great deal of work taking place behind the scenes. We’re excited about the opportunities ahead and laying the groundwork for success in the quarters ahead of us. On Slide 4, in terms of capital, this was a very busy quarter with several significant developments that I wanted to highlight. We ended the quarter with a CET1 ratio of 17.2%, up 70 basis points from prior quarter post-dividend accrual and another quarter of very strong capital generation. We decided on several key capital items during the quarter considering our two strategic acquisitions. First, both Knab and Barclays Consumer Bank Europe operate in a standardized approach. Given these acquisitions will grow our total balance sheet by approximately 35% and our retail and SME business by over 70%, we have taken a decision to return to the standardized approach for our Retail and SME business. We informed the ECB of our intentions during the third quarter, which will be formalized in the first quarter of ‘25 and have already taken the full impact this quarter, adding over €900 million of RWAs to our Retail and SME segment, which was offset by the sale of the German Bausparkasse business, executing a consumer unsecured SRT and lower business volumes. Ultimately, we took this decision to simplify our business, allow for more streamlined integrations and better product alignment across the group given the convergence of the standardized approach to IRB for our business model. All of our past acquisitions were on the standardized approach, and we believe this better aligns with our product offering and an approach of centralized risk management across the group. As part of our overall capital planning, we plan to continue executing synthetic risk transfers or SRTs, for both loss mitigation as well as capital-release purposes. Going forward, we will retain our IRB foundation and specialized lending models for our non-retail and SME customer businesses. Second, given the two concurrent acquisitions, our growing geographic footprint and the integration work ahead of us over the coming years, we have decided to increase our CET1 target by 25 basis points to 12.5%. We will also limit excess capital distributions for both 2024 and 2025 to over 13%, 50 basis points above our new target to be both cautious and prudent as we integrate two large and strategic acquisitions. This reflects our disciplined approach to capital allocation in the changing contours of our business. More importantly, we forecast our pro forma year-end CET1 ratio to be over 14%. This takes into account the two strategic acquisitions, the impact of Basel IV and a strong pipeline of lending opportunities we see in the fourth quarter. With the year-end pro forma CET1 ratio of greater than 14%, we will have generated gross capital over 360 basis points, deployed approximately €500 million of excess capital towards two strategic acquisitions that will add over €250 million of pretax profit by 2027, accrued and annual dividend of at least €400 million, return our retail and SME business to the standardized approach, address the impacts of Basel IV and we’ll still have over €200 million of excess capital above our new capital distribution threshold of 13% for full year 2024. This is a true testament to the strong profitability and high capital generation of our business. We plan to hold an Investor Day in tandem with our year-end results on March 4, 2025, and will address potential capital distributions at that point. On Slide 5, our retail and SME business delivered third quarter net profit of €131 million, down 4% versus the prior year and generating a very strong return on tangible common equity of 33% and a cost income ratio of 32%. Pre-provision profits were €201 million, down 2% compared to the prior year, with operating income up 2% and operating expenses up 12% versus prior year. Risk costs were €25 million. The retail risk cost run rate has now returned to pre-COVID levels as multiple stimulus and government support programs have now expired. We continue to see solid credit performance across the business with an NPL ratio of 2%. We expect continued earnings growth across the retail and SME franchise in 2024, driven by strong operating performance. Overall, we see muted customer loan growth given low new originations in the mortgage space offset by growth in consumer and SME. On Slide 6, our Corporates, Real Estate and Public Sector business delivered third quarter net profit of €40 million, down by 6% versus prior year and generating a strong return on tangible common equity of 23% and a cost/income ratio of 26%. Pre-provision profits were €54 million, down 6% versus prior year. Risk costs were effectively zero. However, we used €10 million of our management overlay to address an NPL in our U.S. office exposure, which we have marked conservatively. Despite the office NPL, we continue to see solid credit performance across the business with an NPL ratio of 70 basis points. We pride ourselves on disciplined underwriting, focusing on risk-adjusted returns and not blindly chasing volume growth as we continue to remain patient and disciplined. We’ve built a strong pipeline of new lending opportunities during the third quarter that we anticipate funding in the fourth quarter focused on both residential and public sector opportunities. On Slide 7, an update on the real estate portfolio. Our real estate portfolio is stable this quarter. The portfolio continues to perform well reflecting the underlying exposure to residential, logistics and industrial assets, which make up 69% of the total portfolio and 83% of our total U.S. exposure. Our office exposure in the United States stands at €264 million, down 59% versus the peak in 2022. The remaining portfolio is approximately 70% performing and 30% nonperforming. The performing portfolio has a debt yield of approximately 10%, occupancy levels of approximately 80%, a weighted average lease term of 6 years with solid tenants and an LTV of approximately 75%. The performing U.S. office exposure represents less than 40 basis points of total assets in 4% of our total real estate exposure. As I’ve stated many times before, the stress we are seeing in certain asset classes, U.S. office, in particular, will differentiate banks in terms of underwriting and asset quality as we see greater dispersion across lending portfolios. With that, I’ll hand it over to Enver.
Enver Sirucic: Thank you, Anas. I’ll continue on Slide 9, a strong quarter with net profit of €178 million and a return on tangible common equity of 24%. While net interest income was down by 1% versus prior quarter, the net commission income remained strong, up by 1% versus prior quarter. Year-over-year as well as versus prior quarter, core revenues were down by 1%. Operating expenses were flat in the quarter and cost to income ratio stood at 32.3%. Risk costs were €25 million in the quarter, down by 9% versus prior quarter. We consumed €10 million of the ECL management overlay, which now stands at €70 million. On Slide 10, key developments of our balance sheet. A few things I would highlight here. Customer loans were down by 1% in Q3 and 3% year-over-year, which also led to a decline in risk-weighted assets. This was largely driven by the Corporates business. Our customer deposits were up quarter-over-quarter. Our cash position increased to €15.6 billion this quarter. Cash and cash equivalents make up 28% of the balance sheet, leaving us with a very comfortable liquidity buffer to address potential organic and inorganic market opportunities in the coming quarters. On the next slide, our customer funding, which is made up of customer deposit and AAA-rated mortgage and public sector covered bonds, it’s flat versus prior quarter at €46.2 billion, with our cash position now at €15.6 billion. In terms of customer deposits, we have not seen any relevant structural changes in the third quarter and the overall deposit betas are now at around 35%, which is in line with our expectations. With that, moving on to Slide 12, core revenues. Net interest income was down by 1% versus prior quarter, with a very strong net interest margin of 304 basis points. Overall, we have seen lower volumes in the business and an expected pickup of deposit betas from 32% to 35%, leading to a slightly lower net interest income. In terms of net commission income, up by 1% with an overall good performance across securities and payments business in our retail and SME segment. On Slide 13, operating expenses are flat in the quarter. We expect to offset the largest part of inflationary increase through further simplification measures and therefore, expect a stable cost base in Q4. This is prior to any impact of M&A. Moving to Slide 14, risk costs. Overall, continued strong asset quality with a low NPL ratio of 1%. We booked €25 million of risk costs in the third quarter and hold a management overlay of €70 million. We still expect risk costs in ‘24 in the context of 25 to 30 basis points. On Slide 15, given the recent approval of the Knab acquisition, we are updating our full year profit before tax target to over €950 million to account for 2 months of the Knab acquisition, and we are fully on track to deliver a return on tangible common equity of greater than 20% and a cost to income ratio of under – of 34%. We expect a year-end pro forma CET1 ratio of greater than 14% post two strategic acquisitions, dividend accruals of at least €400 million, post Basel IV impact and after returned our retail SME business to the standardized approach. And with that, let’s open the Q&A, please.
Operator: [Operator Instructions] We will now take our first question. Please standby. And the first question comes from the line of Noemi Peruch from Mediobanca (OTC:). Please go ahead. Your line is now open.
Noemi Peruch: Good morning. Thank you for taking my questions. My first question is on Knab. The employee run-rate from your guidance points at €180 million. Could you please clarify the moving parts of the upgrade and indeed comment on this €180 million vis-à-vis your previous indication, which was more than €150 million, if I’m not mistaken? And then on cost, I see that the run rate is plus 5%. Previously, we had the guidance of plus 3%. And could you please give us a bit of details on this, whether you expected you had higher than expected inflation or whether the cost cuts you envisaged were delayed for some reason? And my third question is on the move from IRB to standardized and if you – and here, if you could please outline the benefits of the move? Thank you.
Anas Abuzaakouk: Okay. Thank you, Noemi. I mean, it was a bit hard to hear, but let me just – I think I’ll try to recap. The impact from Knab vis-à-vis our increased upgrade on the pre-tax profits and OpEx and then next standardized approach, okay. I’ll take the first, and then Enver, you want to take that. So Noemi, the Knab acquisition factors in 2 months, hopefully closing is in the next few days. You should read from that, obviously, the upgrade is in large part resulting from the Knab acquisition. Now when we signed the acquisition, we gave guidance of over €150 million of pretax profit. There’s a lot of moving parts. The most being – the most significant is the interest rate environment next year. We will provide more guidance in terms of the accretion that takes place from the Knab acquisition during the Capital Markets Day. But suffice it to say, from our initial pro forma, things look, I think, more positive than what we had initially anticipated when we communicated the signing earlier in the year. Do you want to take the outlook?
Enver Sirucic: Yes. So the second question was on OpEx. I believe it was – our guidance is 3% year-over-year versus a run rate of 5%. I think it’s somewhere in the middle. I think it’s going to be around 4%, so not really a big difference. The main reason for that is just having higher costs for integrating the businesses, Knab and Barclays this year. I think on inflation, there was obviously the effect that it was as expected. So yes, there is going to be probably a bit 1 percentage point higher run rate in the OpEx than what we said before. I think the third question was IRB versus the standardized approach. I think there are multiple benefits. One of them is all the recent acquisitions that we have done are in a standardized approach. So our natural actually approach is standardized approach, two-thirds of the book before the acquisitions are on standardized approach. It will simplify the overall structure for us, and we also do believe the growth is going to be in the standardized approach. Also keep in mind, we have been doing, from a risk management perspective and also from a pricing managing perspective we have always underwritten banks based also on a standardized approach. So for us, it is really a simplification of the overall RWA landscape.
Noemi Peruch: Thank you. If I may, I have a follow-up on the cost answer. So if the higher costs are related to the integration, shall we consider that 1% of higher growth as non-recurrent? Thank you.
Anas Abuzaakouk: I would just say, no, instead of splitting hairs in terms of – I think Enver gave kind of the guidance for the year. I think it’s more important what does the trajectory look like into ‘25 vis-à-vis your OpEx with the two acquisitions as well as we’ll try to break out kind of the underlying. But to be quite frank, it’s a bit of a rounding error I think is what you’re focusing on? And what’s more important is what is the actual cost to income ratio and the OpEx development for ‘25 and beyond. Thank you.
Noemi Peruch: Thanks.
Operator: Thank you. We will now take our next question. And the next question comes from the line of Mehmet Sevim from JPMorgan. Please go ahead. Your line is now open.
Mehmet Sevim: Good morning, Anas. Good morning, Enver. I hope you are well. I have three questions, please. First of all, in your capital trajectory, you’re signaling a strong lending pipeline for the fourth quarter. And I was just wondering where you see the lending opportunities given the muted momentum recently. Does this imply an improved lending appetite on your side or have you adjusted your credit box? And maybe can we read this as an early signal of the end of the weak momentum that we’ve seen recently? And my second question would be on the NII sensitivity. If you could kindly provide us with an update on the group sensitivity for next year considering the recent moves, maybe at least at a core level that would be super helpful? And finally, on Basel IV impact, if I’m not mistaken, the guided impact was de minimis recently. So I was just wondering what’s changed there? And if you could clarify the exact expected impact and where it comes from? Thanks very much.
Anas Abuzaakouk: Great. Thank you, Mehmet. I will take the first on lending opportunities I guess, NII, and then we can also address Basel IV. Mehmet, on the lending opportunities, I think we probably hit a trough in the third quarter. And why I say that confidently is we have a pretty robust pipeline more so in the non-retail so this is kind of corporates, real estate, public sector. Within that, specifically, we see a number of resi opportunities, which is – we’ve always been positive on that kind of space but we’re finally starting to see term sheet signed. There seems to be more movement there. A lot of it is also refinancing opportunities, which is great because you come into existing cash flow generating opportunities. So that would be great. Public sector, we’re seeing some movement there. So we’re quite bullish on that front. I think corporates too we probably hit a low point in the third quarter. But that’s been an area in the past few years I think absent any change in kind of just the risk-adjusted returns, it’s going to be hard for us to compete. But obviously, we’re always going to be focused on trying to be able to extend credit in that space. You had mentioned an adjustment to credit box, absolutely not. If anything, we’ve probably been more conservative, but we see some really interesting opportunities. On the retail side, we mentioned it during the call, but mortgage originations, has been muted in the past 1.5 years really corresponding with the increase in rates. I think we’ll start to see that pick up really going into ‘25. Where we see good opportunities is in the non-mortgage consumer and SME. That’s across leasing, factoring, a number of other areas across our business, personal loans and cards. I think third quarter, in general, is probably the trough in terms of lending, and we’ll start to see increased customer activity across the board. Do you want to take NII?
Enver Sirucic: Yes. Mehmet, on NII sensitivity, so the way we look at it is the first 100 bps, so going from 400 to 300 basis point level are going to be de minimis. I mean we can see it already now after 3 rate cuts. The net interest margin was really holding up quite well. The next 100 bps going to 300 to 200 will have an impact on net interest margin, not as pronounced as we have seen it on the way up, it’s going to be less of an impact. Having said that, we will see a bit of a NIM compression, but that will be offset by, obviously, M&A and also the lending pipeline that looks really good. So, a long way of seeing that NII will be growing from now on for the rest of the year, but also into 2025, so small NIM compression, growing NII for the next couple of quarters. And Basel IV, nothing changed. So we said de minimis, and it is going to be de minimis. We just put it in as part of the Q4 pro forma. That’s also – we plan to disclose it. So year-end should really capture all known impacts from standard, from Basel IV, from both acquisitions, from everything. So we have a clean picture by year end and can take that as a starting point for excess capital discussions.
Mehmet Sevim: That’s very clear. Thanks very much.
Anas Abuzaakouk: Thanks, Mehmet.
Operator: We will now take our next question. And the next question comes from the line of Mate Nemes from UBS. Please go ahead. Your line is now open.
Mate Nemes: Yes. Good morning and thank you for taking question. I have two questions, please. The first one would be on the capital side of things. Would you be able to provide us a bridge or kind of walk from the 17.2% CET1 as of the end of Q3 to the north of 14% pro-forma number by year-end? I hear you on the acquisition impact, some de minimis impact from Basel IV. But if you could lay out that bridge, that would be very helpful. And the second question is on the office portfolio in the U.S. has declined by 30% and I think you have used €10 million of overlays for an NPL case. Could you talk about how would you see the quality of that book, whether you have any other potential situation there? What do we expect into provisioning in that segment? Thank you.
Anas Abuzaakouk: Thanks Mate. Enver, you want to take the capital, I will take office.
Enver Sirucic: Yes. So, I think Mate, in a simple way how to think about it, is you have the regular earnings, you have the dividend accrual, so call that 40 basis points to 50 basis points net that we are going to accrete it in Q4. And the rest, that’s why we gave also the RWA guidance, it comes from the RWA piece going from 17.8% to 22.5%. And this combined will get you 72. We kept it a bit open above 14% is what we believe. A majority of that RWA is really tied to the M&A activities assuming both deals in that number.
Anas Abuzaakouk: Mate, as it relates to office, what we try to do is – to address your question, kind of where we see kind of things developing. We took kind of a look back. The peak of U.S. office exposure, which is the most acutely distressed asset class that we have seen in quite some time, was about €640 million. That’s down almost 60%. So, we are down to €260 million plus, of which over 70 – call it, 70% is performing, we gave the stats in the performing, and the nonperforming is around about €80 million or so. But if you go from the €640 million down to where we are today, we have taken almost €30 million of our management overlay really applied to U.S. office. You can say that’s, call it, 4.5% to 5% loss rate. We hope to be able to recover that as we recapitalize or those assets have been recapitalized because of the cash flows. But I think more importantly, I have said this before, the worst is behind us as we see the remaining portfolio and the amortizations and the refinancings, but it is still a very distressed asset class. And it goes back to your day one underwriting. I think you will be able to see the quality of that underwriting, the advance rates, the sponsors that you work with, the permanency of the cash flows. And look, I think one thing that we have as an advantage and this doesn’t – this informs how we look at the different assets is we are not worried about an NPL, we are worried more about asset recovery and making sure that we are making the right decisions as it relates to that particular asset. So, we try to avoid any of these extensions that are uneconomical. We try to preserve our position and we try to work with sponsors, existing or new sponsors that put in equity that help with the overall asset recovery. And I think that’s – that approach has served us well. I think it has more to do, honestly, with the day one underwriting than anything else. But if you get that right, I think then you have optionality day two, and that’s what we have seen with the portfolio. So, we feel really good about the €180 million. We never say never, but I think all things considered, this should hopefully be behind us.
Mate Nemes: Thank you.
Operator: Thank you. We will now take our next question. Please standby. And the next question comes from the line of Gabor Kemeny from Autonomous Research. Please go ahead. Your line is now open.
Gabor Kemeny: Hi team. A couple of follow-ups left for me. One is on the NII guidance. Enver, when you said you expect the NII to grow next year, was that on a like-for-like basis or including the M&A? And if the latter, could you please share any thoughts on the like-for-like development? And the other question was a follow-up on the U.S. office. I mean what do you think is the likelihood of more provisioning over Q4. I mean up to 30 basis points of provision guidance leaves room for more P&L provisions. You have €70 million of overlays. Why would you not get over with running of this portfolio? Thank you.
Anas Abuzaakouk: Gabor, sorry, the line was a bit hard, but I will take the office. I think your question was, is there any more provisions expected, no. I think the €30 million that we have taken on office over the past 2 years, that is sufficient. We never say never, but we feel pretty confident definitely for the fourth quarter. And then there was a question.
Enver Sirucic: Yes, I think you asked like NII projection. That does include M&A. I just said there is going to be some NIM compression limited from just the rate cuts, but that will be more than offset by the new business and obviously the M&A transactions.
Gabor Kemeny: Got it. Thank you.
Operator: Thank you. We will now take our next question. And the next question comes from the line of Johannes Thormann from HSBC. Please go ahead. Your line is now open.
Johannes Thormann: Good morning everybody. Some follow-up questions from my side as well. First of all, on NII again, if we look at Q4 and your guidance of an uplift on absolute levels versus Q3, can you give some more details what is changing in the new business and the underlying business despite the rate cuts that you expect an uplift versus Q3? And then probably just running ahead or looking ahead on the Knab contribution, if we look at their annual report, this would suggest that a monthly NII contribution is something like €30 million per month. Is that fair to assume? And secondly, on the risk side, you clearly reduced the office exposure in the U.S., but seemingly, you kept the European office exposure relatively stable if I do a rough calculation on the numbers page – of Page 7. So, what is the difference between those asset classes in your view? And probably just on looking a bit ahead, if we take the risk profile of Dutch mortgages, your cost of risk in the next year should come down from this year’s level. Is that fair to assume?
Anas Abuzaakouk: Thanks Johannes. I will have – Enver, do you want to take the…?
Enver Sirucic: I will take the first one, maybe.
Anas Abuzaakouk: The last one, I will take the office.
Enver Sirucic: Yes, sure. So, first one, Johannes, the underlying NII, so assuming no acquisitions, it’s going to be very, very stable in Q4 compared to Q3. So, the uplift in NII purely comes from the Knab acquisition, the two months that we are having. On the guidance, what Knab will contribute, I think it would make sense to probably do an analyst call between now and the Capital Markets Day just to give you guys bit more details around the composition of the P&L. I just – we are about to close it only in the next few days. And once we are done with the analysis, we will then do a follow-up call. Risk cost ratio, I think the question was, will the risk cost ratio be lower given the Knab acquisition, I think it will dilute, obviously, just given they are all mortgages. On the other side, once we have closed Barclays, that is a higher risk cost ratio business, also a high-margin business. So, we think that’s going to be almost a natural offset. One will dilute, one will increase, ballpark will be at very, very similar levels as of today.
Anas Abuzaakouk: And then Johannes, I think you asked about just office in general, not just the U.S. If you just go back to ‘22, the total office exposure when the U.S. was €640 million, it was about €1 billion in Europe because it was a quarter of our €6 billion of real estate portfolio. If you now move forward, since that point in time, we have deleveraged the U.S. office from €640 million to €260 million, as I mentioned and went through the dynamics, and we feel pretty good about where we stand. But equally as important, I think it was a good question that you raised, is the European office exposure went from €1 billion to slightly over €500 million, no losses. The issues in Europe are fundamentally different than the U.S. So, in the U.S., it’s a secular change, in U.S. office is really, I think the work from home has been a real drag or an Albatross on U.S. office buildings. And then you – couple on top of that, more aged buildings that have been hauled out in some of these metropolitan areas, and that’s been a real issue or real challenge. In Europe, it’s not the work from home as much. It’s just the cap rates that people lent at pre-raise and interest rates were 2% to 3%. They were ridiculously low. We have always said that we never lent into that environment. But the actual cash flows are quite stable, and that I think more than anything else. So, if you got the underwriting right day one, I think you will be fine. It’s the folks who lent into 2%, 3% cap rates that are going to have real issues because you are going to see a re-jiggering of the capital structure for those office buildings and we are fine on that front. So, Europe has actually been a really positive development. And the U.S. has been the one that I have always highlighted that’s acutely distressed, and I think the worst is behind us. So, a good question, thank you.
Johannes Thormann: Thank you.
Operator: Thank you. We will now take our next question. And the next question comes from the line of Jeremy Sigee from BNP Paribas (OTC:). Please go ahead. Your line is now open.
Jeremy Sigee: Thank you. Thanks for the question. Good morning. Could I just pick a bit more of the NII outlook? You said that the reduction from 300 basis points to 200 basis point ECB rates have some impact. Could you give us a rough idea of how much that impact is on the like-for-like book just so that we can understand the sensitivity of that move? And then the second question on NII, could you just give us an update on the structural hedge, the size of that hedge and the yield that is sort of currently being returned and what that might step up to?
Anas Abuzaakouk: Jeremy, I will hand this one to Enver.
Enver Sirucic: So, we have not disclosed anything, Jeremy, in terms of NII sensitivity. But as I have said, it’s fair to say, first 100 bps, almost no impact, second 100 bps, far less than what we had previously. The previous impact, if you go back was the – we went from 235 bps to 300 bps pre rates and post rates. Most of it will be conserved, there is a bit of a timing topic to it and you pointed to it, it’s a structural hedge. So, if rate cuts come as they are forecasted, which is going to be very quick, we cannot absorb the full impact of it in ‘25. That’s why we will see some NIM compression. But looking into ‘26 and ‘27, everything else static, we will pretty much recover most of that effect through the structural hedge in the coming years. So, stable, small dip in ‘25, recovery ‘26, pretty much kind of recovered in ‘27. That’s how the kind of mechanics are and then actually growing them in the outer years. Like-for-like, no M&A, nothing else happened in the world. How the structural hedge is designed is basically we have a 40% very short overnight up to three months, that is to absorb the deposit betas. And the remainder 60% is split. A majority of that is in the longer term hatch, which is a 10-year rolling. And then we have a 3-year roll-off hedge, which is supporting some of that recovery that I mentioned of the second cut out rate cut away. That’s the design of it.
Anas Abuzaakouk: Don’t forget you got to factor in, obviously, the M&A and then the increased volumes the one we just kind of highlight. And so that’s why I think waiting to the Capital Markets Day, absent just kind of looking at things at a like-for-like might not provide the best picture kind of the go forward because there is a lot of moving parts, but we also understand the nature of the question.
Jeremy Sigee: Thank you. That’s very helpful. Can I just ask a quick follow-up? Your comments sort of implied a shift away from M&A with these two big acquisitions to digest, and possibly more of a sort of share buyback kind of emphasis. Is that a fair interpretation, or is it still wait and see?
Anas Abuzaakouk: No. Jeremy, I would say, look, we have two strategic acquisitions. They are going to add over 35% to our balance sheet. We need to fully digest and absorb the acquisitions. So, there is a lot on the integration front. M&A is a key plank to our business model. I think we have demonstrated that with almost over 14 acquisitions over the past decade. And buybacks are a key plank, what we do with our excess capital. So, they will go hand-in-hand. But the reality is we are focused on integration for the foreseeable future, at least from an M&A standpoint, so.
Jeremy Sigee: Thanks guys. Thank you.
Operator: Thank you. We will now take our next question. And the next question comes from the line of Tobias Lukesch from Kepler Cheuvreux. Please go ahead. Your line is now open.
Tobias Lukesch: Thanks. Good morning. Just two follow-up questions on my side, please, around capital. In terms of the RWA growth from potential lending in Q4 maybe, is that relevant in the fact that it would be relevant to point out maybe what an impact that is? And thinking about the capital ratio guidance above 14% CET1 ratio on the pro forma for the financial year ‘24. Is it fair to assume that this ratio might be even closer to 15% than the 14%? Thank you.
Anas Abuzaakouk: In terms of just volumes, I think you…
Enver Sirucic: Yes. I think yes, Tobias, so on the RWA growth from lending, it plays a role in the overall RWA outlook we provided for Q4, but much bigger is obviously the M&A piece. But both are considered completely in the RWA number. We can’t give more on the CET1 ratio than just saying over 14% because there are still moving parts. So, it would not be fair to give any more guidance than that.
Anas Abuzaakouk: Tobias, I have mentioned there is a strong pipeline. But term sheet to actual funding, you don’t control that. So, I think it would be more prudent to wait until year-end because we will actually have a firm figure. But we thought giving over 14% will be good guidance at least directionally for you guys to work with.
Tobias Lukesch: Understood. Thank you. And maybe a follow-up on the U.S. office as well, the big reduction basically of the U.S. office portfolio by €112 million, how is it exactly achieved in Q3?
Anas Abuzaakouk: Yes. Tobias, that one was one where NPL that went to REO [ph], recapitalized new equity investors, and we feel pretty good about that particular position.
Tobias Lukesch: So, at the end of the day, this was sold?
Anas Abuzaakouk: This was – new investors were brought into the asset, but we continue to be in the asset, so.
Tobias Lukesch: Okay. So, your portion dramatically dropped basically from having – that was potentially not a whole loan you had or because I guess you were rather in the syndicated space there, right?
Anas Abuzaakouk: Tobias, that one was one we marked before. We were conservative in our mark. We had marked it under 50% LTV on current valuation. So, we feel pretty good about the recovery on that. But what we are more I guess positive on is, you have new equity investors that came in that will be able to manage the asset as opposed to letting the asset drift. And that’s important in terms of any office exposure that you have the right sponsors and equity guys behind itself.
Tobias Lukesch: And this really dropped the exposure by €112 million for the performing side?
Anas Abuzaakouk: Not €112 million.
Tobias Lukesch: I am just puzzled like by the sum because a single loan should normally not drop your performing exposure by €112 million.
Anas Abuzaakouk: I think there is FX. It’s not €112 million, there is a couple of FX movements and amortizations, but it was the NPL from last year – last quarter that went into REO.
Tobias Lukesch: Yes, it’s a majority impact basically. But then I mean there was not a big sale kind of, right, or FMES-RT [ph]?
Anas Abuzaakouk: No. It was the majority of this was actually going to REO. But I don’t think it’s year-over-year, that’s why I am cautious not to give you there, because there were some amortizations as well as just FX adjustments there. The majority is REO, Tobias. Good question.
Tobias Lukesch: Thank you.
Operator: Thank you. We will now take our next question. And the next question comes from the line of Hugo Cruz from KBW.
Hugo Cruz: Hi. Thank you. You already answer my questions, I just had one more. The big increase in cash and cash equivalents in 3Q, did this have a material positive impact on the NII? And how do you expect the cash number to look like in Q4? And what really, why do you increase this so much? Thank you.
Enver Sirucic: Hugo, no, it didn’t have any post increases. So, we are just then gearing into the ECB. So, it’s like bucket-by-bucket, it doesn’t really move. We issued quite a bit, and we had an increase of deposits. So, we issued AT1 in senior preferred, it was €1 billion. We had private placements and also customer deposits went up while the lending was a bit slower. So, that combination gives you a high cash balance. We might expect slightly lower just giving pickup in lending, but the acquisitions are bringing new cash to the balance sheet. So, total, probably the balance will not change dramatically. Hopefully, just from a relative perspective, 28% might drop once we added the two businesses.
Anas Abuzaakouk: Just to add on Enver, the €1 billion that we issued between the AT1 as well as senior preferred, that was really in anticipation of the two M&A. So, we are trying to get ahead of in terms of MREL and just different requirements. Yes, almost 30% of the balance sheet is in cash. And hopefully, we are going to start being able to deploy that.
Hugo Cruz: Thank you.
Operator: Thank you. We will now take our next question. And the next question comes from the line of Chris Hallam from Goldman Sachs. Please go ahead. Your line is now open.
Chris Hallam: Hi. Just two quick follow-ups left from me. So, first one on betas, 35% or around 35% in the quarter. Just how much of the change Q-on-Q there is the reference rate versus your deposit rates? And then obviously, the kind of closing is going to impact that slightly. But on an organic basis, how would you expect betas to move through to year-end? And then second, and again, sorry to come back on Knab, but the accretion that I guess we are looking at in the guidance change this morning. Just if I try and isolate that €25 million or so, is there any seasonality or episodic items in the final two months of the year to be aware of. And you talked about the rates kind of picture into next year for this, but just any one-offs in that November, December number we need to be aware of?
Enver Sirucic: On the first one, Chris, on the betas, so the increase is purely driven by the reference rate, nothing to do with the customer yield. But the customer yield is actually coming down. So, expense for customers is it’s going down. The reference rate is going down a bit quicker. And now that’s going to be the question for the next coming quarters, how quickly can we adjust to the new rate. While the Knab is out, there is nothing seasonal. The only thing I would keep in mind they are having a record year, just given the overall rate environment, and they benefited significantly on the deposit margin. That is not going to be the case for the coming years, but that’s reflected in all our numbers and our forecast.
Chris Hallam: Got it. Thank you.
Anas Abuzaakouk: Thanks Chris.
Operator: Thank you. We will now take our next question. Please standby. And the next question comes from the line of Jovan Sikimic from RBI. Please go ahead. Your line is now open.
Jovan Sikimic: Yes. Good morning one again. I just have, I think really a minor one. I think a couple of days or weeks ago, we read about the interest in Mercedes Bank portfolio in Austria. Can you maybe share some kind of details or what’s your plan on that? And I suppose it is quite a small transaction, should be, right?
Anas Abuzaakouk: Hi Jovan. Yes, you are absolutely right, very small transaction, under €100 million portfolio size, which should be closing in the fourth – late fourth quarter, early first quarter. But really, it’s less – I know there was a whole discussion on the merger. It’s less M&A, just more acquiring assets.
Jovan Sikimic: Yes. Okay. Thank you.
Anas Abuzaakouk: Thanks Jovan.
Operator: Thank you. As there are no further questions, I would now like to hand back to Anas Abuzaakouk for any closing remarks.
Anas Abuzaakouk: Thank you, operator. Thank you everyone for attending today’s call. Thank you for the many questions. I thought it was pretty robust. We look forward to hosting everybody for our Capital Markets Day on March 4, 2025, as well that’s going to be coupled with our year-end results. And there is going to be a lot to cover. So, thanks everybody, have a great rest of the year, and we will catch up soon. Take care.
Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect. Speakers please standby.
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