Fintech Competition And DACH Reliance Will Undercut Performance

Key Takeaways

• Intensifying digital competition and demographic shifts threaten BAWAG's traditional revenue streams, limiting sustainable growth and weakening customer acquisition and retention.
  
• Geographic concentration and persistent high operating costs increase vulnerability to regional shocks and regulatory changes, constraining profitability and pressuring margins.
  
• Strong digital integration, disciplined cost control, robust capital management, and conservative risk practices position BAWAG for resilient growth and sustained profitability.

Catalysts

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

• The ongoing digital disruption and increased competition from fintech companies threaten to erode BAWAG's retail banking market share, especially as digital platforms continue to attract younger and more tech-savvy customers; this pressure on customer acquisition and retention could undermine traditional revenue streams, leading to declining net interest income and a stagnating top line.
  
• The heavy reliance on Austrian, German, and other DACH/NL markets leaves BAWAG particularly vulnerable to adverse economic shocks or regulatory tightening in those regions; this geographic concentration increases the risk of volatile revenues and greater cost of compliance, impacting both earnings and return on equity over time.
  
• Prolonged low or negative interest rates, as experienced in the Eurozone, are expected to continue compressing net interest margins; with little sensitivity to further rate cuts and high deposit betas already present, BAWAG may struggle to defend its profitability if rate repricing benefits fade and wholesale funding costs increase, directly weighing on group earnings.
  
• Demographic headwinds across core markets, with aging populations in Austria and broader Europe, signal a long-term slowdown in loan demand and reduced appetite for traditional banking products, setting up constraints for sustainable revenue growth as younger generations gravitate to non-traditional providers and older cohorts increase withdrawals and reduce borrowing.
  
• Persistently high operating costs, driven by legacy systems, ongoing integration of recent acquisitions, and regulatory requirements-including the need for continued investments in ESG compliance and digital transformation-could prevent BAWAG from achieving meaningful improvements in its cost-to-income ratio, leaving net margins under persistent downward pressure despite temporary cost-saving initiatives.

BAWAG Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on BAWAG Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming BAWAG Group's revenue will grow by 8.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 47.2% today to 47.1% in 3 years time.
• The bearish analysts expect earnings to reach €985.8 million (and earnings per share of €13.82) by about July 2028, up from €772.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 8.7x on those 2028 earnings, down from 11.0x today. This future PE is lower than the current PE for the AT Banks industry at 9.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.62%, as per the Simply Wall St company report.

BAWAG Group Future Earnings Per Share Growth

Risks

• BAWAG Group is demonstrating strong progress in digitalization and integration of new platforms, such as the successful integration of Knab and Barclays Consumer Bank Europe, which is likely to enhance operational efficiency and expand customer reach, supporting higher revenue and improved net margins.
  
• The company maintains impressive cost discipline, reflected in a cost-to-income ratio of around 37%, with expectations for further cost reductions as the full-year operating expenses are guided to stabilize around €800 million, indicating the potential for sustained high net margins and profit growth.
  
• BAWAG's robust capital position, including a CET1 ratio of 13.5%, ongoing share buybacks, and dividend payments, signals continued confidence in capital return policy and shareholder value creation, which can underpin high per-share earnings and overall total returns.
  
• Demographic trends in core European markets, particularly increased demand for consumer and SME lending, coupled with muted mortgage growth being offset by strong performance in consumer loans and specialty finance, point to resilient and likely growing fee-based and interest income revenue streams.
  
• The company's conservative risk management, strong asset quality with a low NPL ratio, and proactive response to sector challenges (e.g., rapidly reducing US office exposure) suggest resilience against credit deterioration, supporting stable earnings and protecting net margins in the long term.

Valuation

• The assumed bearish price target for BAWAG Group is €88.6, which represents two standard deviations below the consensus price target of €120.01. This valuation is based on what can be assumed as the expectations of BAWAG Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €141.06, and the most bearish reporting a price target of just €79.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €2.1 billion, earnings will come to €985.8 million, and it would be trading on a PE ratio of 8.7x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of €107.9, the bearish analyst price target of €88.6 is 21.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.