Synthetic Risk Transfers And Knab Acquisition Set To Enhance Capital Efficiency And Propel Earnings Growth

Key Takeaways

• Strategic acquisitions and standardization aim to improve efficiency and profit margins through streamlined operations and product alignment.
  
• Strong capital efficiency and lending opportunities suggest future earnings growth and enhanced shareholder returns through effective risk management.
  
• Integration and capital challenges from acquisitions, along with credit risks and rising expenses, may pressure BAWAG's margins and future financial flexibility.

Catalysts

Operates as a holding company for BAWAG P.S.K.

• The acquisition of Knab in the Netherlands is expected to increase profit before tax, with over €950 million forecast for the full year, indicating potential revenue growth from integration and synergies.
  
• The standardization approach and strategic acquisitions could streamline operations and product alignment, potentially improving net margins by increasing efficiency.
  
• The company plans continued execution of synthetic risk transfers, which could enhance capital efficiency and lead to higher future earnings through effective risk management.
  
• The pipeline of strong lending opportunities, particularly in residential and public sectors, suggests anticipated revenue growth in these areas and could impact net interest income positively.
  
• The forecasted significant pre-tax profit and a strategic capital allocation with a target CET1 ratio above 14% imply strong capital generation, which could translate to enhanced shareholder returns through earnings growth.

BAWAG Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming BAWAG Group's revenue will grow by 13.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 47.8% today to 41.2% in 3 years time.
• Analysts expect earnings to reach €837.3 million (and earnings per share of €11.45) by about December 2027, up from €672.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.2x on those 2027 earnings, up from 9.4x today. This future PE is lower than the current PE for the AT Banks industry at 12.9x.
• Analysts expect the number of shares outstanding to decline by 2.33% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.69%, as per the Simply Wall St company report.

BAWAG Group Future Earnings Per Share Growth

Risks

• The acquisition of Knab and Barclays Consumer Bank Europe will consume approximately €500 million of excess capital, which may increase the financial burden and integration risks on BAWAG, potentially affecting future net margins.
  
• Adjustments to the capital framework and CET1 targets due to acquisitions and Basel IV impact suggest possible pressures on capital adequacy, which could restrain future earnings or dividend capacity.
  
• With customer loans down by 2% and low growth in new mortgage originations, muted loan growth may limit revenue generation and impact earnings positively in the short term.
  
• Operating expenses are up 12% year-over-year due to inflation and integration costs, which could continue to pressure net margins if further cost-saving measures are not effectively implemented.
  
• Exposure to U.S. office real estate, which includes a mix of performing and non-performing loans, presents ongoing credit risk that could result in increased provisioning and impact profitability if market conditions worsen.

Valuation

• The analysts have a consensus price target of €94.08 for BAWAG Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €111.37, and the most bearish reporting a price target of just €79.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €2.0 billion, earnings will come to €837.3 million, and it would be trading on a PE ratio of 10.2x, assuming you use a discount rate of 7.7%.
• Given the current share price of €80.15, the analyst's price target of €94.08 is 14.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.