BAWAG Group AG

Thank you, operator. I hope everyone is doing well this morning.

I'm joined by Enver, our CFO. Let's start with a summary of third quarter results on Slide 3.

We delivered net profit of EUR 219 million, EPS of EUR 2.77 and return on tangible common equity of 28%. The performance of our business was strong with operating income of EUR 555 million, pre-provision profits of EUR 354 million and a cost-to-income ratio of 36%.

Total risk costs were EUR 52 million, translating into a risk cost ratio of 37 basis points as we continue to see solid credit performance across our businesses. In terms of our balance sheet and capital, average customer loans were up 1% and average customer deposits were down 2% quarter-over-quarter.

We have a fortress balance sheet with EUR 13.5 billion of cash, an LCR of 201% and an overall strong asset quality with a low NPL ratio of 76 basis points. During the third quarter, we completed our EUR 175 million share buyback and canceled 1.6 million shares, leaving us with 77 million shares outstanding, which is down 23% from our IPO back in 2017.

For the quarter, we landed at a CET1 ratio of 14.1% after deducting the dividend accrual. The operating performance of the business across the group was solid, but we continue to be patient and disciplined with 19% of our balance sheet in cash in a market environment where we believe credit is still frothy.

The integrations of Knab and Barclays Consumer Bank Europe are both going well with the growth of the cards business really standing out. The teams are focused on the blocking and tackling of integrations and executing on our road map.

The gains you see are incremental but build up with each passing quarter. This is the first quarter where you see integration efforts start to materialize in terms of reduced operating expenses, and this will continue in the quarters ahead.

As for key milestones, we are planning for the Knab Bank merger to be completed by the end of this year and have been working on testing key system migrations scheduled in 2026. Our goal with both integrations is clear, fully integrate into the group operating framework and culture, work as one team and speak with one voice.

Both integrations have also served as a catalyst for an organizational redesign as we grow into a pan-European and U.S. banking group.

The foundation of this redesign is a digital-first approach to banking, complemented by a strong advisory-focused branch network. We are now able to realize the gains of technology investments made over the years in creating a common tech ops platform that can scale with the benefits increasing from various operational and AI initiatives.

We plan to share more of what we've been working on with year-end results. The recent stress in corporate lending does not come as a surprise.

We have witnessed a blind focus on volume growth leading to lax underwriting and increased risk taking in various forms. In contrast, our approach has always been to remain patient and disciplined, prioritizing risk-adjusted returns over share of volume growth.

Ultimately, increased stress and volatility in the market work to our advantage as they lead to a repricing of credit risk and a return to more rational and disciplined lending. We are on track to exceed all 2025 targets and are building momentum going into 2026.

With strong earnings and capital generation, a fortress balance sheet and a long-term mindset geared to avoiding the latest fad or hype cycle. Our focus is prudent capital allocation, making investments that drive long-term profitable growth and preparing the business for both the opportunities and challenges stemming from volatile markets, technological innovation and disruption and an ever-changing banking landscape.

Okay. Moving to Slide 4, capital development.

At the end of the third quarter, our CET1 ratio was 14.1% after completing the EUR 175 million share buyback program and EUR 120 million dividend accrual for the quarter. For the quarter, we generated 114 basis points of gross capital, of which 94 basis points was through earnings.

We executed the mortgage SRT during the third quarter, providing relief of approximately EUR 470 million of RWAs against mortgages that were under the standardized approach. We have excess capital of EUR 258 million, 110 basis points above our capital distribution target of 13% in 2025.

In terms of any Basel IV output floor impacts, we have zero RWA inflation as we have a buffer of 20 points to our output floor level given 90% of our business is currently on the standardized approach. We will revisit any further capital distributions with year-end results after considering any new business and/or potential M&A opportunities.

On to Slide 5. Our retail and SME business delivered third quarter net profit of EUR 188 million, a very strong return on tangible common equity of 37% and a cost-income ratio of 35%.

Pre-provision profits were EUR 311 million, up 57% compared to the prior year. The retail risk costs were EUR 56 million with a risk cost ratio of 58 basis points.

We continue to see solid credit performance across the business with a low NPL ratio of 1.2%. We expect continued growth across the retail and SME franchise in the fourth quarter, driven by strong operating performance as we fully integrate the 2 acquisitions and solid growth in consumer and SME with mortgage originations starting to pick up.

On Slide 6, our corporates, real estate and public sector business delivered third quarter net profit of EUR 39 million and generating a strong return on tangible common equity of 31% and a cost-income ratio of 25%. Pre-provision profits were EUR 53 million, flat versus prior year.

Risk costs were positive with a EUR 1 million release as we continue to see solid credit performance across the business with an NPL ratio of 10 basis points. As I mentioned earlier, we believe there will be increased stress across the corporate lending space more broadly.

No different than U.S. office, when stress builds up, you begin to see the difference in underwriting and asset quality.

As far as our U.S. office exposure, this was down 17% during the quarter and 82% since 2022, with the remaining portfolio of EUR 118 million of performing loans equal to approximately 20 basis points of total assets and 2% of total real estate assets.

We will stay patient and continue to focus on disciplined underwriting, risk-adjusted returns and not blindly chase volume growth. With that, I'll hand it over to Enver.

Thank you, Anas. I will continue on Slide 8.

Strong quarter with net profit of EUR 219 million and a return on tangible common equity of 28%. Core revenues were up 1% versus prior quarter, with net interest income up 1% and net commission income up 4%.

Operating expenses were down 3% in the quarter and cost/income ratio stood at 36%. Risk costs were EUR 52 million or 37 basis points, broadly in line with the prior quarter.

The tax rate in the second quarter was 26%, reflecting our more diversified geographic footprint in 2025. On Slide 9, the key developments of our balance sheet.

Overall, average customer loans were up 1% and average customer deposits down 2% quarter-over-quarter, resulting in a 2% decline in total assets. We maintain a strong cash position at roughly 20% of our balance sheet, ensuring enough liquidity for future market opportunities.

However, with spreads remaining at current market levels, we'll stay patient and continue to focus on risk-adjusted returns. Core revenue developments on Page 10.

Net interest income was up by 1% in the third quarter. The average 3-month Euribor remained flat this quarter and is expected to remain at this level, so we will start to see more positive developments in the coming quarters.

The group's deposit betas decreased by 10 percentage points to 38%, primarily due to a reduction of high-cost deposits. In terms of outlook, we expect to see a continued positive trend for the rest of the year.

Net commission income was up 4%, reflecting the ongoing positive trend in retail and SME as we have seen over the past quarters. We expect a stable development in the fourth quarter.

On Page 11, operating expenses were at EUR 200 million, down 3% in the quarter and in line with our expectations. The integration of the acquisitions is progressing in line with plan, and we see initial integration effects already materializing.

We are also making progress on operational initiatives aimed at further streamlining our processes and unlocking long-term productivity gains across business lines. We will provide an update of our progress with full year results.

We expect integration effects to continue to develop positively in the fourth quarter, and we, therefore, reaffirm our full year guidance of approximately EUR 800 million in operating expenses for 2025 and operating expenses below EUR 200 million for the fourth quarter. Regulatory charges were EUR 10 million in the quarter and expected to be around EUR 40 million for the full year.

Moving to Page 12. Risk costs were EUR 52 million in the quarter, broadly in line with prior quarter and in line with our expectations.

Asset quality remains solid with an NPL ratio of less than 80 basis points. We continue to see a robust credit performance and continue to see risk costs at approximately 40 basis points for the full year.

Let me close with the outlook and targets on Page 13. We expect to exceed our 2025 targets of a net profit of EUR 800 million and earnings per share of more than EUR 10.

And with that, let's open up for Q&A. Thank you.

So my first question is on the use of excess capital. Can you walk us through your latest thinking on how you decide between deploying excess capital towards the dividends, share buybacks or M&A opportunities?

And what are your key priorities in determining the optimal use of excess capital? And how should we think about the potential frequency and scale of the share buybacks going forward, given that your CET1 ratio at 14.1% remains well above 13% distribution target and your capital generation is strong.

And the second question, just on the asset quality, do you see any read across for BAWAG from the recent U.S. credit events and the broader concerns about the credit cycle?

What are you seeing on the ground regarding your U.S. exposures within your portfolios?

And if you can give your rough estimate of BAWAG's exposure to private credit.

Thank you, Gulnara. Let me just try to unpack.

There's a couple of questions. I'll start with the excess capital.

So Gulnara, just consistent with prior years in our capital allocation framework, we'll wait till the end of the year with year-end results, assess the excess capital situation. And then based on obviously, where new business development comes in, in the fourth quarter and then as well as any potential M&A portfolio opportunities, we'll make an assessment as far as capital distributions.

But the framework is organic growth, new business opportunities, which we have a pretty decent pipeline in the fourth quarter. And then we have our 55% dividend accrual, which has been happening throughout the course of the year.

And then we'll look at special dividends or buybacks in the absence of M&A. And all of that will be assessed.

As to where we stand today, buybacks have been a part of our capital distribution framework. If you kind of take a forward-looking view in terms of 2027 targets, our excess capital generation, kind of overall valuation, we still think share buybacks are a critical part of that distribution framework.

It makes sense from a capital allocation standpoint. But look, we have to look at that at the end of the year and see what's on the offering.

As to your question on just overall corporate credit, as we went through the third quarter results, I made a comment around just our broad view to corporate lending. And no different than what we've seen in other asset classes in the past.

You see this kind of this focus on volume growth really translate itself into aggressive lending. And that aggressive lending, you see that in eroding underwriting standards and this really kind of a singular pursuit of volume growth, and that leads to bad things.

And I think what we've seen over the past few weeks in kind of the U.S. corporate lending space more broadly.

People say private credit, but I think it's more broad than just private credit. I think you see some cracks there, and that's something that people should be aware of.

I brought to highlight or the example of U.S. office.

I think when you have these periods of distress, you really see the differentiation in terms of underwriting quality between different lenders, be it banks, private credit or the like. So hopefully, people are familiar with how we underwrite over the years.

I think U.S. office is a pretty good example of that in terms of differentiating our underwriting standards and our approach to lending.

And I think this will be no different. So we'll see what happens.

But I think, look, we have a very narrow view of the market, but it's hard not to say that there's been stress recently in this space.

These follow on a little bit from the previous questioning. Could you talk a bit more about loan growth?

You've obviously seen some in the quarter. You had 1% Q-on-Q loan growth, and you mentioned the decent pipeline.

Could you just talk about where the opportunities are? So where are you seeing demand and attractive pricing that you can take advantage of?

So that's my first question, where you see the good loan demand. And then secondly, just again following up, you talked about the year-end review of capital deployment and the question about M&A opportunities.

What's your view on timing for how soon you could start more serious work on M&A projects? How much would we have to wait for that to be realistic?

Okay. Good questions, Jeremy.

Let me start with the loan growth, and I'll address kind of just M&A framework more broadly. So loan growth, if I kind of take you through kind of a tour of just the different asset classes, I would say consumer and SME has been pretty robust across the board, if you kind of see quarter-over-quarter, but as well as on a year-to-date basis.

And that's really driven by the credit card business. I mentioned it that the Barclays has really been a standout business, more so than we had underwritten to, to be honest.

And the consumer loans in general across the different jurisdictions has performed well. And we see opportunities in secured lending starting to pick up.

On the corporate side, that's more idiosyncratic. That has been, I'd say, a bit more spotty in terms of quarter-over-quarter.

We had 3% growth this quarter, but that's on the back of deleveraging from prior quarters, and that's going to be more idiosyncratic in terms of unique corporate lending opportunities. Real estate has picked up.

That was up 2% this past quarter, and we see a pretty good pipeline. Hopefully, we get back to kind of where we were at year-end.

So that's been a positive development. Housing has been a challenge, not so much from a market opportunity.

Those are out there. It's just from a risk-adjusted return standpoint.

The pricing has been pretty aggressive, and we try to be disciplined in terms of the margins that we anticipate on that side. But we're seeing a pickup in the third quarter, so hopefully, we'll see positive developments in the fourth quarter as well.

And I'd say the 2 areas that have been most challenged, public sector, that was down quarter-over-quarter. But the challenge in public sector is there's opportunities.

But when you see public sector tenders, whereby municipalities or states pricing tighter than sovereign in the same country, that just seems a bit unusual in upside down. So that's something that we won't participate in.

And that's more -- that's less a credit issue. That's just more from a yield and margin standpoint.

And then the securities portfolio, you've seen continuous deleveraging. The reality is investment-grade corporate credit at all-time tights, whether it's bank paper, CLOs, sovereign across the board, across that whole construct, spreads are super tight at all-time lows.

So we'll be patient. And that kind of takes you through a tour of all the different asset classes.

So that's on the loan growth. On M&A, I would say, Jeremy, 2 types of M&A.

There's the bolt-on M&A, which is more kind of you're really kind of -- there's an installed customer base. There's a unique channel and then you kind of absorb it into your overall platform.

By platform, I mean kind of your centralized functions and your technology and your operations framework. And then there's the strategic M&A.

So as it relates to strategic M&A, that's going to take some time if there was anything on the offering. The bolt-on M&A are things that we can execute at any time.

And I think by the end of the year, we'll have a better sense of where we stand on the bolt-on M&A. Those are the 2 long-winded answers to 2 questions.

Truly helpful.

Thanks Jeremy.

A few questions from me. First one is on NII, where you had very solid dynamics in the retail and SME segment and some more negative dynamics in Corporate Center.

Can you elaborate a bit on that? And going forward, should we expect the customer business to drive your NII?

Or is there any distortion we should model from the Corporate Center? That's the first one.

Second one, NBFI, a big focus, obviously. Thank you for providing the additional disclosures on Page 21 in your presentation, very helpful.

Any additional actions you have been taking on the back of the recent events, news flow? Or is it all business as usual for you, especially if you could comment on the U.S.

part of this exposure, please? And the final one is really a clarification on capital deployment.

Just in terms of the sequence of events from here. So in the next 3, 4 months, you will see how the M&A pipeline develops.

And let's say, at the Q4 stage, if you have nothing imminent, you would distribute what you have above a 13% CET1. Is it a fair way to think about it?

Yes. Thanks, Gabor.

Let me just take the last one on the capital distribution because that's a fairly easy answer. Yes, that's the case.

We'll come back in February with year-end results and be able to make an assessment in terms of where we see with capital distribution and lot of new business and then potential bolt-on M&A. And then I'll just take the NBFI or the kind of the lender finance more broadly.

So we did provide additional disclosure, Gabor, on Slide 21. And the reason being is just to be able to differentiate between what you're seeing in the market as opposed to what does actually lender finance mean.

And really, the takeaway here is this is -- these are senior financing facilities, warehouses, akin to kind of CLO, advance rate of up to 50% on average, kind of a look-through LTV of 2.5x across the host of corporate lending that takes place. But I think the real thing to focus on is the granularity of pool.

There's over 400 companies across 10 facilities. We get comfort from that granularity, that diversification and overall concentration limit.

So that's performed very well, absent one idiosyncratic event, which I think Enver had mentioned in the first brands where we had an EUR 8 million exposure. Other than that, we're in a pretty good position.

And as I said earlier, during these periods of increased stress and volatility, that's where you start to see opportunities where credit risk gets repriced. And hopefully, we're able to take advantage of some of the opportunities that there's more rational and pragmatic lending in the marketplace.

And I'll pass it to Enver for the NII.

Yes. So I think, Gabor, your question was on what is driving the NII growth in the future.

Definitely, it's business driven. It's going to be all business.

The elements that you see in the corporate center are reconciliation topics and also some technicalities around timing of repricing and interest rate changes. So I would expect that to be rather close to zero and in the future to see everything happening in the business segments.

The first one is on deposits. If you could talk about what is driving the quarter-on-quarter decline, please?

And how should we think about the growth going forward? Also related to that, the net interest margin, should we think about the 3.25% in 3Q as being the trough and the trajectory should improve from here on?

And the second question is on -- you talked about long-term productivity gains. What are your thoughts around productivity gains from AI?

If you could talk about any projects that you are working on currently, please? And what's the outlook there?

Let me start with the OpEx and you can take that's more [indiscernible] Amit, I'd say the -- just on the OpEx, this is the first quarter -- 2Q was a peak as far as overall operating expenses. You saw the decline this quarter, and that will continue in subsequent quarters as we start to harvest the gains of the integration efforts and the productivity focus.

AI is a bit of a catch-all. Everybody talks about it.

It's a bit of a cliche and there's some hype to it. The reality is for us, and we'll talk about it at year-end in terms of some use cases.

AI has just been an accelerant. We shouldn't lose focus that a lot has been done already in terms of machine learning, which I guess falls under AI, process reengineering and automation.

That's been going on for years, and we've been making those investments for years. So I think AI is just an accelerant to that, but we'll provide more details at year-end.

Enver, do you want to take that?

Yes. So on the deposits, Amit, in Q3, what really happened was a reduction of high-priced deposits, both on the retail side, which were predominantly online deposits in Germany.

And the other part was money market deposits on the corporate side. So high-priced deposits that we let go in Q3.

I would not expect that to continue. So our assumption right now is for the rest of the year, stable deposit volumes and probably in the other years a bit of growth on the deposit side.

In terms of net interest margin, we always said like 3.25% to 3.30% is kind of the guideline that we have for NIM, and that's going to be very stable also in Q4. That's the expectation.

I have 2. Firstly is on the NII trajectory going forward.

I understand business volumes are one of the main drivers. I would like to ask if there's any benefit from the structural hedge.

Also, if you could please remind us on this? And then my second question would be, given the German fiscal stimulus, I would like to ask if you expect some benefit in your -- in the corporate loans going forward?

Yes. Let me take the NII question, Borja.

So yes, so it's going to be business growth, is one of the main drivers for NII growth in the other years. But also, we will benefit obviously from the structural hedge.

So that roll-off of the hedge of prior years is a net contributor in the next 2 years and is a part, obviously, of the NII guidance that we provided for '27. Ballpark, you can say it's probably 1/3 deposit driven, 2/3 asset driven, the NII uplift that we expect.

On the fiscal stimulus, it's not there yet, to be honest. So yes, we would expect maybe there is an uptick in public sector activity, but it still takes time, I think, till the transmission mechanism works.

Also 3 questions from my side, please. One on capital and 2 regarding the U.S.

On the capital and the SRTs, maybe you could elaborate a bit what is in the pipeline for Q4. And in terms of the excess capital we might see by year-end, is it fair to assume roughly EUR 400 million on that side?

On the U.S., with the exposure, I think the filing we have the EUR 6.7 billion by H1 gives the total exposure on balance sheet, you're around EUR 7.5 billion on total. You gave some splits in presentations and so on.

We get to EUR 5.1 billion. Maybe you can elaborate a bit on the gap we don't see currently.

You mentioned EUR 300 million nonbank financial institutions, but give a bit of a flavor what the rest is? And thirdly, in general, it seems like you're a bit more upbeat on the expansion into the U.S.

recently in the wording, at least what I'm reading. So maybe you can give us also a bit of a flavor like how your further actions over the next years in the plan, how they see this U.S.

exposure basically moving from that kind of 12% on balance that we had currently with H1 results.

Great. Thanks, Tobias.

I'll take the first one. Capital and SRT.

So pipeline. So we just did a mortgage SRT in Q3, and we are working on a smaller consumer SRT that is small in size than the one that we just did in Q3.

And in terms of excess capital, Tobias, we don't provide the exact guidance, but probably you can see from our organic development, what we are doing in the quarter and extrapolate the numbers.

I'll take the U.S. question.

So good question, Tobias. I would say let's start with the acquisition of Idaho First Bank, when we did that a few years ago, that was to be able to provide a banking license and raise deposits in the U.S.

And at the time, the bank was EUR 0.5 billion or so in size, Fast forward a few years. What we've been able to do is complement what we've already done in terms of corporate and real estate lending in the States.

And just to also not confuse the lender finance that you've mentioned, that is on the corporate side and that's part of that EUR 7 billion that you mentioned of real estate and corporates. And the retail and SME side is a mix of what we have in Idaho First Bank, what we acquired, what we've grown there as well as what we're doing on the retail and SME side in terms of asset origination platforms.

And that kind of runs the gamut. 80% of that is effectively secured lending in one form or another.

And that's been part of our overall growth trajectory. I think you hit the nail on the head.

The most important thing is if you look at the context of what we call the DACH now versus Western Europe and the States, that split will probably be 90-10, 85-15, 80-20, not at any given point in time, but that will kind of go through cycles. But I think those are kind of the bookends of how you should think about the overall asset exposure across the different jurisdictions.

Is there something else there?

Yes, that's it. Thank you, Anas.

Yes. I think that's quite interesting also.

I guess you keep the kind of split with the retail SME, therefore, versus corporates, right? That's not going to be changed on that whether you have expansion.

But maybe quickly on this EUR 300 million nonbank financial institution exposure, can you elaborate a bit on that? And maybe like are there other bigger blocks of asset exposure to one or the other address you might want to highlight?

No. I mean the reason we put that additional disclosure Tobias was just to kind of demystify when people talk about private credit or NBFIs or all these different topics, we wanted to be able to kind of highlight lender finance and what does that actually mean?

But I would caution people there's a whole gamut of what exactly does NBFI lending entail. This is through the lens of follow-up and how we actually underwrite in the areas that we're focused on and what gives us comfort.

But I think it's going to be different for every bank until there's consistency in terms of disclosure and also just operational definitions around these terms, to be honest.

I've got 2 quick ones. Just a follow-up on SRTs.

I was wondering do you see any constraints to using this tool just generally? And what kind of benefits do you see?

Are you -- do you have a target in terms of basis points of capital uplift that you're seeking with these particular tools? And just my second question, you saw quite a decent increase in your total reserves Q-on-Q.

I was wondering, should we expect that to continue into year-end and into next year?

You want to take that?

Yes, Ben, I'll take the SRT question. Can you just repeat the last question?

I think he said the increase in reserves. which is, by the way, Ben, that's reserves and I myself got confused on that.

So on the SRT, yes, good question. Are there any constraints?

Yes, leverage is something that we look at. Maybe just to remind everyone why we are doing SRTs, the majority -- I mean, close to 100% of our balance sheet is under standardized approach.

So we use it for 2 reasons. The one reason is that we applied for risk mitigation.

So for especially consumer loans and the likes, it's a downturn protection more so than a capital relief transaction. And for the mortgages and high-quality assets or low-risk assets, it's really just to bridge the gap between like a standardized approach, risk weight and the true risk of the asset.

So there is more potential and the real constraint is the leverage that we are looking at. Yes, I think that's how we would look at it.

And on the total reserves, yes, it's both, as Anas said. So it's the LPs as well as the NPE backstop that builds up in that position.

And what you should know, Ben there is as you have consumer unsecured and cards, right? Those have the highest provisions.

So that's the strongest correlation in terms of coverage, and that runs from 70% to 90%. So that's probably why you see this uptick.

But don't forget the NPE or the Prudential Filter is in that number as well.

Thank you, operator. Thank you, everyone, for attending the call today, and look forward to catching up with year-end results in February.

Take care, and have a nice day.