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Q1 2020 Deutsche Pfandbriefbank AG Earnings Call Unterschleisseim Jul 13, 2020 (Thomson StreetEvents) -- Edited Transcript of Deutsche Pfandbriefbank AG earnings conference call or presentation Wednesday, May 13, 2020 at 9:00:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Andreas Arndt Deutsche Pfandbriefbank AG - Chairman of Management Board, CEO & CFO * Walter Allwicher Deutsche Pfandbriefbank AG - Head of Communications ================================================================================ Conference Call Participants ================================================================================ * Dieter Hein Fairesearch GmbH & Co KG - Partner * Johannes Thormann HSBC, Research Division - Global Head of Exchanges and Analyst * Tobias Lukesch Kepler Cheuvreux, Research Division - Equity Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, ladies and gentlemen, and welcome to the Deutsche Pfandbriefbank AG Conference Call regarding the Q1 2020 results. (Operator Instructions) Let me now turn the floor over to your host, Mr. Walter Allwicher. -------------------------------------------------------------------------------- Walter Allwicher, Deutsche Pfandbriefbank AG - Head of Communications [2] -------------------------------------------------------------------------------- Good morning, and a very warm welcome to our Q1 results call in what is probably rightly considered to be difficult time. Here with me is Andreas Arndt, and Andreas will lead you through the presentation, which I suppose you all have available in front of you. And he will take your questions afterwards. Andreas, please go ahead. -------------------------------------------------------------------------------- Andreas Arndt, Deutsche Pfandbriefbank AG - Chairman of Management Board, CEO & CFO [3] -------------------------------------------------------------------------------- Yes. Good morning, and welcome to our analyst call regarding PBB's first quarter 2020 results. Thank you for dialing in. I hope you and your families are well and healthy. And you, at least most of you, will have arranged yourselves for working from home. As mentioned, we do have clearly unprecedented times, which also, unfortunately, does affect, to some extent, the PBB. As already communicated in the beginning of May, we came in for the first quarter with a PBT of EUR 2 million, including EUR 45 million effects from COVID-19, or to put it the other way around, without these effects, we would have shown a good result of EUR 47 million, which is more or less stable year-over-year. The effects from the COVID-19 pandemic relate to changing economic and sector-specific forecast assumptions reflected in risk provisions and credit spread movements reflected in fair value measurements, but so far, no additional defaults. Even though we might currently see some relief measures for public life and for the economy in some of the countries, the effect -- the actual effects from corona disease and from lockdown over several weeks will become visible, at least in our business, only with some delay, i.e., the next quarters still have to show what the effects are and what has really and how much has really eaten into the economy. On the background of such uncertainties about the extent of further developments, with regard to relief measures, economic recovery for the lockdowns, we have decided to withdraw our guidance for 2020. So with that in mind, what are the specific topics, which are COVID-19 pandemic-related, which we would like to share with you and which we -- which have become sort of our daily business? And I refer to Pages 4 and 5 of the presentation. And the first point, of course, which I'll refer to is staff and operations. The good thing is we are fully operational. Approximately 90% of the staff is working from home. That includes all critical functions such as origination, bank operation, risk management and treasury. The situation is absolutely stable. It's supported by state-of-the-art IT landscape. It is, if you want to put it this way, the stress test for the -- for last year's implementation of a new IT system, new IT environment. And the new IT infrastructure has passed the test, I think, admirably. We did, of course, needless to say, implement another additional corona prevention measures at a very early stage, such as social distancing, hygiene measures and so on, with the result that we have almost no affections. Now the second point is what does the situation require in terms of risk focus? And what is, of course, organizational in terms of setting up the necessary infrastructure, the organization? We did set up immediately Pandemic Crisis Management Team, which is meeting -- still meeting several times a week to monitor the situation. We looked at the risk profile and the requirements, risk requirements for new business and did tighten our standards above and beyond the already conservative standards. And we put to work, what we call the corona task force, breaking down different topics into 8 working groups which comprise, of course, the credit risk management organization, origination/underwriting, property analysis and so on. They focus on specific topics, which have surfaced over the last couple of weeks and months and make sure -- and take care that overarching issues have been fully made transparent and that incoming client requests for payment delays and things like that will be properly dealt with. That's not a replacement of workout or whatever, that's simply our additional capacity and additional competence in dire times. Now the third point, which in a way should -- always come first, comes third in line is client business and commercial real estate markets. I think it's also important to reiterate and to make clear here that PBB remains a reliable financing partner in difficult times. So we've been working down the existing pipeline and pending deals, which have been followed up and executed where possible and were in line with the PBB's risk focus. But we also have to acknowledge that since the onset of the lockdown, there is a significantly smaller number of new transactions as investors do hold back. That is not that much -- when we come back to that, not that much visible in the first quarter, which has been profiting immensely from our -- sort of in the -- from the 2019 situation and deals which were transferred into 2020. But we see it now that in April, the number of transaction actually goes down significantly. The other point is different commercial real estate areas are definitely affected. We do see, in some places, significant reduction of net rental income or net operating income to various degrees, and you will not be surprised to see hotel and retail to be amongst those which are most affected and more affected than office and residential, of course. So that's the picture which will prolong itself into 2020, '21. And it's something which will also be influenced by the way how the economy is moving over the next weeks and months to come, whether it's more sort of V-shape or U-shape scenario in economic development. As now -- and that's not very surprising, and that's apart from any sort of estimations, which we give on property prices. As of now, property prices are still largely intact. We have -- and we don't see any significant valuation movement so far. That's also owed to the fact that we see no forced sales and we would assume that visible adjustments are to be expected in the second half of 2020. The interesting thing is, in a crisis, client relationship is reinvented. Reliably working together between client and the bank is something which is needed in the crisis on both sides. And that has a number of implications for the business. I'll come back to that. When it comes to extensions and prolongation business, that's certainly favorable. We make it the case that, a, the client relationship comes first. The risk assessment of the client relationship comes first, the preparedness of the -- on the ability of the bank is important in terms of capital, which we can put in risk-weighted assets and liquidity, which we can put behind such a transaction and then comes the consideration of pricing. So we don't do deals in this situation. That's the net-net of what I want to say. We don't do deals in this situation because there's a very attractive pricing. There are deals out, which are very attractive in terms of pricing, but the other criteria, i.e., client relationship, risk and efficient use of capital comes first. And having said that, it is even more so than before. There's focus on high-quality clients. It's the focus on -- focus, focus, focus on A1 properties in A1 or 1A locations, at improving margins, though. For low leverage lending, as you will see in the course of the presentation, our LTVs are further down against last year and the years before. The fourth point of consideration in such situations is capital and liquidity, of course. I'll come back to that point. I just want to give the outlook on the main pillars at this point in time. We have always been driving very solid regulatory buffers, which amount to something like 6.5%, 6.8% by now against the, say, restated pro forma 16.3% SREP and against the 9.5% SREP ratio, which we have in place. That determines the bank's capacity to be able to provide loans and credit to customers and provide credit for the second, the benefit of customers and the overall economy. But it's also at the same time, as you know, a buffer for P&L risk. And very sufficient buffer, I should say. And it provides sufficient headroom for potential RWA shifts going forward. But please keep in mind that the last major RWA shift, which we had was only a quarter ago due to a very strict and very complete recalibration of risk parameters with the intention to have more resilience over the cycle. And it's sort of fortunate foresightedness that we have already undergone this exercise to some extent. The equivalent to capital is liquidity. And on the liquidity side, due to the fact -- due to a combination of factors being less new business expected; short tidal wave, so to speak, from 2019 in terms of prefunding and sufficient and very opulent prefunding in the first quarter. We have a liquidity situation, which I would call, robust. And which is of such nature that it extends the liquidity without going to market well into the second half 2020 and covers even internal stress test well beyond 6 months. So that's a good place to start from and structurally not much changed against what you know from 2019 figures. The other point I would like to mention because I think it's important -- it's regulatory important because the transparency, which we have to give, it's required anyway. But also for your information, I think you should need to know, while we stand in using the alleviation measures which are being proposed by EBA, ECB, with the good help and support of the accounting profession. The overall line states avoiding cyclical overreaction and doing the necessary things in order to keep credit rolling credit to the economy. We do use a longer-term calibration for property prices assumption in 2020. But otherwise, and that's the key message we have abstained so far from using any other alleviations such as blocking stage migration, topside adjustments and others. I'll come back to that point. The key message is also in how we treat things from an accounting point and a regulatory point of view. I think we stay more on the conservative side of the spectrum. As much and as far as we can give some view, I don't call it guidance or something else but have a view on what the economic development might be and how that sort of reflects on the calibration of risk cost. There's -- as much as we can say as of today, or as of March and April figures, we base our assumptions -- economic assumptions on the forecast so far on the forecast of the German Sachverständigenrat, the council of experts and we assume a V-shaped development as probably most of the economists do these days, with the recovery beginning in Q3 and a rebound of markets in 2021. And we assume that property market value is expected to decline significantly in PBB's portfolio end of 2020. Or I should say, in the market, how much that is reflected in our portfolio remains to be seen. And it's a significant decline in markets with an average discount in -- of 20%, if we stick to our adverse scenario for 2020 with a further decline of some property classes in 2021 also implies that some of the property classes will go up in 2021 as well. That's important -- those are important assumptions for how we steer the calibration of risk costs, stage 1 and stage 2. We use these estimates. We constantly monitor the sort of the up-to-dateness of our assumptions, and with the unsecured environment in which we live, I would say it's not saying too much that we will have this reassessment also by second quarter and possibly some readjustments to the risk costs going forward. With all that, and that's the last point on that Page 5 is sort of the breakout of effects, which are related to the operative performance which we put at EUR 47 million and the COVID-19 effects, which are EUR 32 million gross on risk provisioning from stage 1 and stage 2, and EUR 13 million value adjustment or fair value measurement out as EUR 13 million as a total. Both together amounting to EUR 46 million related -- or EUR 45 million, sorry, related to COVID-19 measures. So that's sort of the cornerstones amongst which we move these days and also move in our discussion around the presentation. Now with that, I would turn to Page 6 and would just go through the key or the cornerstones of our P&L with some more comments coming on the risk side and the value side at a later stage. As I said, the operating result, I think, is quite gratifying. PBT at EUR 2 million after EUR 48 million which we had, mostly and predominantly owed to COVID-19 pandemic effects. However, NII is slightly down in the year-over-year due to an average interest-bearing financing volume, which went down by EUR 400 million. So a small deviation and more so according to -- or as an effect of our good prefunding, which I had already mentioned, counterbalanced by the fact that the income from realizations has gone up by EUR 8 million. The general admin and expense are slightly up due to higher cost for regulatory projects, but in line with plan, and EUR 30 million below last quarter. It's only, as I mentioned, EUR 4 million is provisions for stage 3 on the U.K. Shopping Center, which is already being provided for where we stepped up the provision and which, as such, had nothing to do with corona circumstances. As usual, we also book a bank levy for the -- in the first quarter for the entire year, which we estimated at EUR 20 million, so stable over last year. So those are the cornerstones on financials. On new business, we reached EUR 1.7 billion, EUR 1.6 billion of that real estate finance. So that's where the focus lies, which is a solid level, which is in line with expectations. It's in line with the plan. And you may remember that we took down plans against 2019 for 2020 already to some degree. So that's perfectly in line with what we were looking forward to. It is gratifying that you see average gross margins going up to 170 basis points or rather a bit more than that. Which is 15 more than the 2019 levels, and it's about 30 basis points approximately above our plans, which is an important consideration to the question as how, on operative terms, we're moving along with NII projections through the entire year. I'll come back to that. Our pipeline still -- and that's sort of -- a bit of surprise, I should say, still supports significant amount of very selective and high-quality new business. But as I've said, as of this stage, we observed lower investment activity in the market. The strategic real estate finance portfolio is slightly down, as mentioned. Public investment finance is stable and value portfolio is further down. Not significantly, but a little bit. I mentioned our prefunding activities and good liquidity situation. By end of March, we already met our first half '20 funding needs or funding requirements. This provides us with sufficient funding position well into second half 2020. Capital ratios, as I mentioned, strengthened further, mostly due to the full retention of 2019 profits, which gives us an extra 70 basis points and bring the CET ratio to 16.3%. The withdrawal of the dividend proposal for 2019, as you have noted, followed the general recommendation of the ECB and the general movement of the market. We will reassess the situation in autumn, sometime in October when and if the impact of the corona crisis provides, say, a better or clearer picture of the overall situation. Now whether we have more certainty at that point of time remains to be seen. It is clear that the lack of certainty or the uncertainty which surrounds every economic activity these days is the reason why we went to our guidance for 2020. In the present, the effects of COVID-19 are not reliably predictable. And the same applies here. We will give new guidance when things become more clear. So to sum up on Page 6, we do show solid operating performance. The accounting and valuation effects from COVID-19 are significant, but so far, no related -- nothing related to any defaults. And the guidance is withdrawn until there's more clarity around the situation. As I have touched, I think, on most of the figures, which you otherwise find on my favorite Chart #7, I would leave that to your digestion for now and would turn directly to Page 9 on markets. Now that's the story which you can make long or short. We decided for something in between, giving a short market overview on Page 9 and some detailed insights on Page 10, followed by some deliberations on economic outlook and property markets. To start with one general observation, and you would not believe it, but the first quarter 2020 was the best first quarter in a row of last years, both in the United States and the U.S. Even after the corona setting, there is still a significant overflow of pending transactions from the last month to be executed and to be closed. That is somewhat -- that's a very practical site remark that's somewhat hampered by some limitations for the values in the second half of March and going onto in April and the months to come because there are certain limitations to site visits, and there are certain limitations to inside viewings. They being alleviated by outside views and inside videos, plus CPs, conditions present in contracts that assessments being made subject to later diligence. So in practical terms, it does not turn out to be a major obstacle. The second point I want to make is already made as no pricing adjustments so far because we have not seen for sales and investors sitting tight on their hands, waiting for better prices from cheaper opportunities to come their way. But what we do see already is in some parts of the business, significant rent reductions, especially in retail shopping centers, factory outlets, hotels, restaurants and where you have a lot of SME tenants. That will, of course, affect future valuations, unless the economy returns to more normal picture quite soon. In that context, as not having mentioned it so far, office still looks very stable and good. It depends very much on the tenants and on, of course, on the location. And on the structure of tenants where there is more co-working type of tenants, the large ones still pay, but the second and the third quarter are also litmus tested in that expense -- in that respect. In general, I would say, the less co-working you see on an office investment, the better. So I'm jumping a little bit to Page 10 and on hotels. In principle, what the situation reviews is that there is a substantial oversupply in hotels -- in hotel capacity in many locations, especially in relocations. We expect further or significant downturn in property prices on that side. We do believe large chain -- well-managed chains will survive, but they themselves will do rigorous segmentation, elimination of the sites or the locations they want to keep on to in future. And business hotels will be back -- much earlier back than leisure hotels and leisure parks. We do have a limited exposure to that. It's 5% of the total with an LTV of 53%. And I think that's the first time that we showed these figures, and I see an interest coverage ratio of more than 300 across the entire portfolio. And the key regions we deal with is Germany and the U.K. And as I said, it's focused on business hotels. Now on retail, there's not much new, which I can review. What we can say is that corona and online, say, work as an accelerator on structural change, that is very clearly visible. There's an overall price pressure from tenants because they were locked down because they make use of the situation because they partially are in default, especially situation, which is very severe for the U.K. side of the business. As you know, we have reported that. Discounters and warehouse centers are still considered to be relatively safe. Now with 16% share of the total portfolio, we have already reduced retail exposure significantly over the last 3 years, i.e., by more than 30% since2016. We now look at the portfolio of EUR 4.8 billion, with an average LTV of 52% and an average ISC of more than 300 -- yes, 300%. Here, again, I think we have a well-diversified regional setup of the portfolio with focus in Germany, 29%; UK, 24%; and CEE, 18%, close to 20%. There's sort of one special branch (inaudible) development loans. (inaudible) say, although they've been typically considered as to be on the high-risk side, in our case, they're doing well. The specific risks, which we deal with or the development investors do deal with is, a, the construction risk or the completion risk. Since 80% of our engagements are in Germany, construction sites are in full swing. We have no delays, which we know. So we assume that there will be proper and in-time delivery of all the projects which we have funded. The other concern is longstop dates. So if you have delays in construction and in delivery, you may trigger the clients' right to withdraw. Or you may sort of give course to the client to renegotiate terms of the delivery that we do not see as a real danger presently, but that's something to monitor and to observe carefully. Now clients, and that can be tenants or can be buyers. There might be some bowing out due to illiquidity or insolvency, not something we have seen recently. The interesting thing is what happens when they come to the market now. There, I can say, for our portfolio, most of what comes to market now is more -- is fully sold or let. And if it -- if we would assume that comes to market in 1 or 2 years' time, I would believe there's a good chance to fill in with new business if the investors are flexible on pricing. We see more risk on the established builders of buildings, which will need to be evacuated and need to be reinvested or refurbished for re-let and the risk actually, in our view, will be shifting from the present buildings to the -- sorry, from the developments to the present buildings. What is not on this list is logistics. It's fairly short to answer. It remains a well-sought-after asset class with still some transactions going around. I think structurally and in the economic terms, I think the last weeks have shown the importance of online sales. The importance of online -- sorry, the importance of seamless delivery. And the importance of good logistics. So on locations, some in principle remarks, I think the large centers in Germany are mainly and mostly okay for Munich, Hamburg, Frankfurt, Berlin. If you look beyond Germany, certainly in New York, the most affected place, we do look at that specifically, not because we believe it's rather more risky than other places. Besides the very special situation, which we like to state that presently there from a corona's perspective, but simply because in the markets where we do business since a relatively short time. We started, as you remember, second half of '16. We do have focus very much on office and residential, which both together covers almost 100%. And we are active only in the large locations. We've discussed this many times. The portfolio presently of EUR 2.7 billion with an average LTV of 56%. We have -- for those investments, which we have there, we have no difficulties to report presently. So with that, I think you have a pretty fulsome picture of where we look at and how we look at certain asset classes in certain regions. If we sort of step back a little bit and look at economy as a whole. The figures, which you find on Page 11 are sort of weighted figures according to our portfolio, both for the IMF as well as for the German Research Institute as well as for the 2 scenarios, which we have set up. The general message is here. Over this cycle, what we assume are -- and what the German Research Institute assume, is very much alike. We are probably closer to the IMF when we look at our adverse scenario. And ultimately, what we have employed in sort of feeding our models, our risk models is somewhere a mixture between our base and adverse scenario, that's the second message. And the third message is, this is something which we did 4 weeks ago. Times have changed, we probably have to look at that again in the light of second quarter developments. In principle -- but that's sort of the short sum up of it, in principle, we do rely on a V-shaped assumption. That's important for -- again, for the modeling of our risk models, a V-shaped assumption, with a rebound in second half and in 2021. And that's the same assumption, which also underlines the Page 12 picture, where you see sort of a range of possibilities between base and adverse, between regions and property types of different ranges of market value development. The base assumption would be a general discount on -- across the board, across the entire portfolio of 10% in market value. If we're leaning more towards the adverse side, it would be 20% discount. So market value either 90% or 80% depending on assumptions. And then if you go into 2021, again, depending on scenario, regions and property types, somewhere in the range between 70% and 90%. So here the clear signal is would we assume that we sort of have a full rebound into property price levels of 2019 already beginning or in the course of 2021. Clearly, no. There's a good chance that sort of the full recovery is being established or accomplished in 2020, 2023. Those are the values of which I don't give sort of a detailed breakout here, but those are the ranges which we use and which we employ in our middle modeling. That's the one thing. And the other thing is we have compared that and benchmarked this very closely against the last crisis, 10 years ago, and looked at the property price developments, netted the necessary achievements and feel sufficiently conservative in our assumptions of how we model risk going forward. And the last point to that effect is, when you ask how we model that on the risk side, I would say, and that's not really surprising for real estate bank. That in our models, the sort of -- the intrinsic weight, which different factors are being portioned to, the intrinsic weight, which relies on property prices, is significant. Now with that, I would turn to Page 14 -- or rather would probably turn to Page 15. Yes. I think 14, you can read for yourself. And I'll start with the details straight away. As I mentioned, the -- on the NII, that's Page 15. On the NII portfolio, the various components, which affect the figure for 2020 first quarter. The first one, to a lesser degree, is the strategic REF portfolio is down by EUR 400 million as maturities exceed new business. The more important thing in terms of doing the NII calculation is the liabilities prefunding, which contributes on the negative side, which also weighs against the run rate of the last quarters, is the accelerating effect from -- negative impact from equity book and liquidity book and the bonus on cash, which has also become dearer. What has been helping is the flows, which were stable. And what is helping going forward is the client gross margin on portfolio and as well also on new business coming from 2019 and in 2020 first quarter, as I said, 170 basis points. So what we would expect going forward is stabilization of the portfolio development -- of the level of portfolio development with new business rolling in at higher margins and thereby, stabilizing NII going forward for the next quarters. A word about realizations on the same page. Half of that is -- roughly half of that is a settlement gained from a premature closing of derivatives' transaction. And the other one comes from prepayments. That's a figure where I can safely say, we would expect not to see that much in the coming quarters, as we would assume that prepayments reduce significantly. Now the other part, which is affected from corona is the fair value. In a way, rather surprising so. And therefore, we have given a bit more information on that position, which otherwise, we have not commented much because the major impact in the past was from structural effects such as the negative pull-to-par, which here, in this case, notes with minus EUR 3 million only. The large chunk is credit-driven with EUR 13 million and approximately EUR 10 million out of that related to specific effects -- spread movements on German subseverance. There's a -- 2 lender -- 2 federal states, which we have on our books, which do not suffice the CCC criteria which are sort of leftover from earlier times. In terms of credit quality, no doubt. But in terms of susceptibility to credit spreads, quite some leverage. Now we would expect those values to come back over time as a sort of positive pull-to-par if nothing else is changing. So we have no worries. But presently, it sort of impacts our P&L. The Italy part, that's the 2 -- minus EUR 2 million of severance, is rather minor. And supranational organization is also a smaller part, and the rest goes with XVAs. So it's explicable. It is somewhat a little bit surprising, but also an element which we would expect to come back. Now on risk provisioning, and that's the other item. That's Page 17. I think what is important in this context is that the risk provisioning, which we show is predominantly related to model-based additions to stage 1 and 2. And that's what you see on the top left side of the chart, stage 1 and stage 2, EUR 17 million and EUR 13 million. So that's a net figure, EUR 30 million gross figure related to corona is EUR 32 million. That, together with more than EUR 30 million, which we worked on in our Q4 results for 2019, makes more than EUR 60 million additions to general loan loss provisions or loan loss reserve within 2 quarters. And that, I think, is significant signal for, say, our conservative approach and for the resilience of our portfolio. The -- what I'd say results and an increase of stock in loss allowances to EUR 169 million, which now makes up for 62 basis points of the real estate finance portfolio and is split up in approximately EUR 111 million stage 1 and 2 related and EUR 58 million stage 3 with stage 3 being stable over time. And the stage 1 and 2, meaning the general loan loss provisions having increased significantly, as I just mentioned, over the last 2 quarters. The chart on the top -- on the bottom right-hand side should give you some indication of where we blotted out the names of the other dots -- but you may do your own calculations, we'll give you a little bit of sort of positioning of the bank towards peers and other banks. It's a broad range of banks, I must admit. What it says basically is that we are more or less mainstream in terms of risk provisioning in terms of basis points. We do calculate that on a quarter-by-quarter figure, not on an annualized figure, to make that clear and as a figure against the total risk provisioning of last year, which in our case was 69% against last year's risk figure -- risk cost figure. The really interesting thing is something which you cannot really see from this chart, but if you read it in the context of the portfolio of others, then you will see that many banks have unsecured exposures such as consumer finance, corporate loans, leveraged loans and things like that. And we sort of structurally have our risk cost calibrated against completely and fully secured portfolio. Structurally, that makes a difference and shows, I think, the degree of conservatism, which we applied in this case. Now Page 18 gives you an overview of accounting interpretations of the European regulators in the light of COVID-19. I would not go through that in detail. It's more for your reading. The general message is, except for the long-term perspective applied to property prices for the 2020 values, we have the other relief measures being offered by ECB, EBA. We basically have not applied. And if there are questions later on, I'll come back to that point, but I think that's the gist of it. What is not on this chart is how capital release are being applied, but I will say a few words about that when we come to capital. And what is not on this chart, and we can leave it perhaps for later discussion, is how we deal with private moratorium, where we not deal with, at all, presently, which is the short answer to a possible question on that side. I think the overarching message, which I mean to leave with you is that, in principle, we stick to the standards of IFRS 9. And we do not see necessity to apply relief measures at this point of time, except for this one question, which I mentioned. Cost is relatively easy. It's stable. Cost-to-income ratio is slightly up because of the revenue side of it. It's still below 50%. You see that on personnel costs, we are still stable, which given all the changes which we had is a rather remarkable result. What is up is not personal cost by another EUR 2 million, which is related to still ongoing -- significant ongoing regulatory efforts, which we have, which would see us busy for the rest of the year for sure. So -- but otherwise, I think costs are well under control, and cost-to-income ratio below 50% is good. Portfolio profile. And I refer to Page 21 now. Let's see. Yes. I think most of the points I've mentioned, the interesting things are, first of all, the average LTV on new business is further down at 56%. If you think 3 or 4 years back, that figure was between 61%, 62% on 63%. So also, in terms of new business and how we allocate LTVs to it, we see ourselves moving to the more conservative side. Consistently so, the gross interest margin, I mentioned, is 170 basis points. What is also interesting is the development of the business mix in terms of new business and portfolio, you will see 58% business done in Germany in the first quarter against 48% portfolio. That is not surprising, and that will be a pattern which you will continue to see over the next quarters to come, not because we don't like the other markets. But partially, it's always a symptom of crisis that you feel more secure at home, to put it this way, but it's also a reflection of the fact that in France, due to the -- actually ongoing lockup, there is very little transactions going around there. There's little appetite on our side to do U.K. business presently. And that leaves basically United States and Germany. And fortunately, in both countries, we do see good deals, and we look after them, and we'll pursue them. And sort of how that translates into portfolio, you can work out for yourself. On property types, again, office is the mainstay of the property types with some investments in residential logistics. Now hotel and retail sort of make -- by its magnitude, may come as a surprise. It is a mixture of, say, pipeline transactions, which we had; extensions, which we willingly and voluntarily did consent to; and 1 or 2 new businesses, which risk-wise, absolute -- and pricing-wise make absolutely sense. That's not a deviation from our conservative and cautious approach, but it's sort of the composition of those 3 elements, determining factors, which I just mentioned. So -- and that translates into the portfolio, as you see on the bottom right-hand side. In that context, I have inserted a chart on Page 22, to make 1 or 2 things more clear. One is, why do we assume that in this critical situation, we would sort of come out throughout 2020 and given what we know at this point in time in a, more or less, flattish, stable development on the portfolio on the strategic portfolio of commercial real estate with around EUR 27 billion throughout the year. Now we have analyzed repayments and prepayments and prepayment behavior in times of crisis. And we analyzed the same thing for new business, new commitments, extension syndication behavior and things like that. And now the regular repayments, we still expect to be relatively stable. The prepayments, which we have seen to the tune of EUR 4 billion last year, we would expect to be significantly less for 2020, we would see a significant increase in extensions and prolongations. And we would, of course, see in terms of few new business commitments, a figure, which is less than we have projected for 2020. If you put that all together, then the sort of relief on the prepayment side and the extension of prolongation side will well compensate for any less new business, which we write, which at the end of the day, without giving exact figures to it, would result in a stable development of our portfolio. That's, as I said at the beginning, I think that's an important cornerstone to the operative development of the bank going forward through 2020. Coming on top, and that's the second remark I want to make on this Slide 2020 (sic) [22] is that a higher-margin with a low share of development loans, a higher share of investment loans will make itself throughout the year in terms of increasing gradually the overall business margin, which we have on our book will be helpful for NII. And the third one is more as a sort of assuring ourselves of what we do and assuring yourself of what we do in terms of how do you originate business in such times. And those are the principles by which we go. We have always looked at prime A locations, and there is a sort of even more A-pronounced location type, which we look at. So very selective on locations, very selective on sponsors. Taking down leverage even further, as you can see, we look at stable cash flows; properties being rented out for 10 years, 15 years, with stable and good tenant quality; solid covenant structures that is especially interesting for the business in the United States where you typically have notice in covenants on LTVs during the lifetime of your loan. That's something which gradually comes back. So that's also good. We -- I mean for all that I've just said for the first quarter, but going forward, no hotels and no shopping centers, retail -- other types of retail-only and highly selective cases. We're presently working on one transaction in an excellent location, excellent sponsor, but has a sort of 50% retail to it. We're probably inclined to do that. But otherwise, that's very exceptional. But otherwise, we abstained from that property class. If we do that, we will focus on neighborhood shopping or high-street retail. Development loans, probably no. And always, if there should be exceptions, subject to strong risk-mitigating factors, i.e., high levels of pre-letting and upfront equity, long-stop dates and lease contracts and so on. And as I said, emphasis is on extensions. That has basically 3 advantages: A, we know the engagement and the sponsor; B, it is less work for us; and C, probably -- not only probably, it comes with higher margins. So with that, you know what we do. Page 23 is a shorter review, which I, more or less, leave to you with one remark on the value portfolio. The negative result, which you see there, is triggered by the fair value addition, which comes through the value portfolio allocation of the lender of Schuldschein, which I described earlier on. So it's rightfully allocated to the value portfolio. Otherwise, very much in line with what you know. 24 -- 25, let's have a look at the portfolio. So to corroborate what I just said, on the portfolio, further downward trend on the LTV as a whole. A relatively narrow spread in terms of regional distribution and in terms of asset class distribution. It's also not quite new. And on the internal ratings, no changes so far, which is not a surprise because we had re-ratings of our portfolio in December 2019. That's the 82%, which you see. And as we haven't seen any further defaults to occur and did not enter into re-ratings so far, the expected loss going through -- or going into cycle is very stable, which is also owed to the more conservative calibration of risk parameters, which we applied in December last year. So with that, also, not much new to tell on Page 26 with the NPL ratios and NPL volumes. The slight reduction on the NPL volume from EUR 495 million to EUR 445 million. That's EUR 17 million out of FX movements of British pound and EUR 30 million decrease related to partial repayment of the ECA-guaranteed public investment finance loan across financing. That's a restructured loan, but it's still in probation period. Therefore, it still shows up, but that's been reduced. Now funding. As I said, we are benefiting from strong activities in 2019 and from good activities at the beginning of the year. We already met our Q1 and second half -- sorry, second quarter funding targets by mid-February, raising altogether EUR 1.9 billion. That was EUR 1.3 billion for Pfandbrief and EUR 0.7 billion for unsecured. An unsecured means preferred as a small residual, which is nonperferred Schuldschein, but 95% is on the preferred side. With regards to funding spreads, we benefited from the good timing. This is -- in this time, really good timing of funding activities. And spreads went down on Pfandbrief and unsecured, as you see on this list 28 -- on the Slide 28, to 13 on mortgages, 5 on public Pfandbriefe and 55 on unsecured. The pbb direkt volume was slightly down, now standing at around EUR 2.7 billion. As we always stated in the past, pbb direkt provides a scalable funding source in addition to capital markets funding and has been kept at that level. We indeed, and in fact, work on new money campaign sort of to see how much replacement we may want to have on that side. Now the chart on Page 29 is, I think, well known to you. It shows the well-known development over the last couple of weeks, where we have seen peaks, which we haven't seen for a very long time, level to come down back to 140. That is something which is still not very attractive in terms of going to market. And as I said, there is no need to go-to-market at this point in time. So we will see and wait and see what the development brings. Page 30 should show sort of prospectively the determinants of funding for 2020. The first important thing to mention is while other banks might be much more severely being affected by wholesale drawings on the credit lines, that is something which, by business model, is not a concern which we have. So we don't have corporate drawing our liquidity lines. When we have drawing on commitments, those are clearly defined drawings, for instance, investment loans, which have been dispersed now or that's development lines where clear conditions have to be met before you can draw. So that's the minor point that makes liquidity forecast much more stable and much more reliable. Prefunding, I mentioned, we have a significant hangover from last year. And we have reduced new business volume expectations for the rest of the year, and that lowers significantly the need to go to market. In all these cases, LCR remains comfortably above 150%, and our liquidity reserve is sufficient to cover even internal stress test well beyond 6 months. So we basically can sit on our hands. What gives more comfort is that there are structurally attractive substitutes available. Now the Pfandbriefe itself is, in a way, a no-brainer. It's a resilient funding source by going directly to market. But also by extending ECB's funding program, we have the ability to deliver on Pfandbriefe to ECB to draw on lines there, which, by the way, makes it even cheaper. Retail deposits, I just mentioned. It's established, it's scalable, and we've set out a new fresh money campaign to reactivate that. Clearly, retail in such a situation becomes more attractive if you measure that against the spreads, which we observed on senior unsecured. TLTRO still provides attractive alternative and a flexible source of funding. We will look into the newly designed TLTRO under the new program. When it comes to it, margin-wise, it's even more attractive than before. So that's something which we take into consideration. And what we're already using is the use funding by ECB at attractive rates. What I also want to say, it's not only the availability of alternative funding sources, which we have. It is also the stability of Pfandbriefe, where you can go-to-market sort of any time at moderate prices. And the third point is with adjusting the funding mix in these times and making use of opportunities, we can lower cost or we can [as comp] or we can balance cost increases, which we see on one hand against advantages, which we see on the other. So that's the other message on funding cost for the entire year '22. We probably would see a more stable situation than the development of senior unsecured spreads may suggest. Ratings on Page 31 are being unchanged. We got a reconfirmation from S&P on the 23rd of April. And it's part of sort of a wholesome review of German -- sector review of German banks, where outlook and ratings have been confirmed. The negative outlook, which you know, which we carry around since some time, is attributable to the Germany BICRA score rating for us in total. In its constituting parts of the rating, nothing has changed. And so it's Moody's PBB Pfandbriefe's ratings, which are unchanged since long. Currently, there is no impact from COVID-19 on the OC requirements. Some small increase in -- which we saw in the first quarter was related to some technical effects and not related to corona. So almost last chapter is capital. As I said, capital ratio stands now at 16.3%, up from 15.2% reported at year-end or -- yes, 14 -- 15 -- sorry, 15.2% reported at year-end figures. RWAs are slightly down by EUR 400 million due to technical effects, regular reviews, construction completions and so on. And the second point I mentioned is the full retention of 2019 profit due to the withdrawal of dividend proposal, which will be reconsidered or revisited in autumn in October once we have more clarity around the overall economic development. As I mentioned, the ECB temporarily lowered capital requirements for CET1, which gives us a relief of 1.09% and has suspended for the time being, the countercyclical buffer of 45. If you take those figures, start with 16.3% CET1 ratio and measure that against SREP requirement of 9.95%. You arrive at a buffer of 9 -- sorry, of 6.35%. If you add the 1.09% SREP relief being granted now back to that figure and add back the countercyclical figure -- countercyclical buffer you end up with a buffer of 7.89%, so almost 8%. 8% buffer on a capital ratio of 16.3%. That's, I think, something which at least makes me sleep well and sound. So I think I can leave it at that as far as the capital is concerned. That brings me to the end of my presentation. Normally, I would have set to the outlook or the forecast on the rest -- forecast for the rest of the year. I have to be a little bit more cautious on that. What we want to say -- what I want to say is the following: The -- first of all, I think the operating performance has been impacted, as we have seen and visited by COVID-19 pandemic. The underlying performance is stable and sound. Risk provisioning remains to model base provisions stage 1 and 2. And the fair value measurement is something which we also see coming back at some point in time. As I say -- as I've said, guidance 2020 has been withdrawn in view of the significant macroeconomic challenges. In particular, on the risk side and the valuation side. For the time being, V-shaped economic development assumed for '20 and '21, it's the sort of guiding light for economic forecast in our case. If and when negative tendencies become more pronounced further risk provisions will be considered. We have -- to repeat what I said at the beginning, we have taken all relevant organizational and risk-related measures to cope with the impacts, and it's working splendidly. I must say, the dedication, motivation and operational stability of our colleagues is fantastic. New business is still important to us. It's very important to us. It's expected to be significantly below initial plan. But as I tried to explain, the culmination of loan repayments, high extensions and very selective new business is expected to safeguard the stable portfolio development. The overall operative performance, I hope I could make clear, is expected to be reasonably resilient. And what is also -- which comes a little bit sort of short in terms of attention, but which is of utmost importance to us, PBB continues to work on cost efficiency and digitalization. We have so far no intention to withdraw or to treat back on investments in digitalization and new technologies, we will continue that. So the crisis is severe, but PBB, with its constituent business model elements, I think, is well positioned, especially for such a situation. And when I say that, I do not only mean -- but also mean the capital and the liquidity and the operative performance in the cost-to-income ratio. What I mean to say, what I want to bring out is, I think we are uniquely positioned in our commercial real estate markets. Commercial real estate or real estate as a whole -- commercial real estate amongst that will remain major asset class through the cycle and after the cycle. We still see excess in investment -- on the investment side, looking for investment opportunities. And we still see, and we'll continue to see in the long run, low interest. And those 2 effects structurally on the investment side and interest-wise, will continue to support our business. In that -- to be in that situation, to be in the crisis situation, a consequent and rigorous senior lender with low LTV is exactly the position where you want to be, where we want to be benefiting from low LTV, benefiting from the fact that the risk always comes after senior lender and sits with the equity and in a situation where we do exactly see margins going up. I think it's something which to look beyond the day and the week is something which fills me with comfort in terms of how we place this business and how we steer this business going forward. So that's it from my side. Thank you very much for being patient and listening in and happy to take questions on your side. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank, Andreas. (Operator Instructions) First question comes from Johannes Thormann from HSBC. -------------------------------------------------------------------------------- Johannes Thormann, HSBC, Research Division - Global Head of Exchanges and Analyst [2] -------------------------------------------------------------------------------- Just 2 questions left from my side. First of all, I still struggle to understand the logic behind your extremely bearish view on hotels, but doing 15% of your new business in Q1 in hotels and then having just a 5% usual portfolio share. This is -- wasn't there an exit option? Why did you do it? Or what is different to the hotels compared to those areas you're bearish on? And secondly, just to understand how much from your trading loss in Q1? Has there been any reversals in April so far? Or is it still all the credit effects or negatives? -------------------------------------------------------------------------------- Andreas Arndt, Deutsche Pfandbriefbank AG - Chairman of Management Board, CEO & CFO [3] -------------------------------------------------------------------------------- I'll start with the easier one, which is what you call the trading loss, and which is not really a trading loss, but it's a valuation loss on the fair value, which we have on our books since long. It is actually quite attractive investment because that's -- even though it's been swapped on the interest side, still provides a significant carry to the bank. It's one of these sort of old leftovers at high margins, and so we like it. The fact that this is being valued at fair value is due to the violation of the so-called CCC criteria. And therefore, we have to treat it mark-to-market. Not because of trading reasons, but because of that. With the introduction of IFRS 9, we had to classify all exposure, and that is a small part which fell under the fair value piece. Now it is very strange because it is 1 of the 2 German lenders, which I would consider to be on the stronger side that you see them part of -- being part of the overall spread development, which you would more expect it to be proficient in the southern countries or whatever. But the spread developments, especially in second half of March, was so strong that even German lender did move in terms of spread, not much, but they did move significantly. And we had to take precautions and we had to take reserves against that. Now would I expect that to come back? If nothing else moves and nothing else comes, we would see that coming back through regular re-ratings and revaluations. And then you have a positive pull-to-par, which comes back to the P&L of the bank. So I'm not worried about that. Now rightfully, you asked about hotels and our bearish attitude and the fact that we do -- still do transactions there. Now first of all, we focus and we concentrate on first-class and business hotels only. And we have done that before. We have done that also in the first quarter. The explanation partially is extension. The explanation partially is one deal, which was, more or less, committed, which we couldn't pull back. And the explanation is one other deal where we jointly looked at and said, be it crisis or not, that's a unique opportunity for the sponsor. And as there is a recourse also attached to that engagement to the sponsor, that's a special situation where we do not rely only on the property as such, but on the sponsor in a very particular and a very specific way, which did allow us to say yes to such a venture. Meaning is we don't set aside commercial sense even in such times. I think it shows the ability and the degree of flexibility, which we have, where others say, no, never ever hotels. And there still will be opportunities in the market where you can do this business, and we will look at them. That does not contradict the fact that we say, in principle, we don't do hotels. And I'm sure, going forward, for the rest of the year, you will not see a new business share of hotels or business hotels of 15% anymore. -------------------------------------------------------------------------------- Operator [4] -------------------------------------------------------------------------------- Next in line is (inaudible) from Deutsche Bank. And after, we have questions registered from Tobias Lukesch and Dieter Hein. -------------------------------------------------------------------------------- Unidentified Analyst, [5] -------------------------------------------------------------------------------- So I have 2 questions, if I may. One on RWA and the other one on your property value assumption. And the first question is your RWA deflation of 3% is disproportionally to your financial volume. And the reason you mentioned in your press release is due to the reclassification and construction completion. Could you please give us some more color on it regarding what kind of change in parameters have you taken? And probably a little bit more details on the construction project. And how much of it is nonperforming loans? And second question to the property value assumption is that you mentioned that PBB use longer-term calibration for property price assumption instead of a single period. Could you please help me to understand here what's the difference that they make here in terms of P&L impact and risk provision treatment? -------------------------------------------------------------------------------- Andreas Arndt, Deutsche Pfandbriefbank AG - Chairman of Management Board, CEO & CFO [6] -------------------------------------------------------------------------------- Okay. No, happy to take the question. On RWA, I mean, first of all, it's -- I think it's a very small movement, which we look at, which comes from various technical effects. There is sort of -- as you may want to get no underlying deterioration of risk, which sort of shows through. When we talk, I think the wording -- what was the page? When we talk about construction completion, that's -- the point is we can take collateral into consideration only after the property has changed hands, all the documentation is done or the construction of the property is completed. So we may actually enter commitments or we may have commitments on our book, which from a regulatory and an RWA perspective are "unsecured" until these prerequisites are being met. So -- and sometimes, there's a certain backlog on keying-in and accounting for the securities or the collateral, which we hold, which we already hold, before it becomes effective in terms of RWA calculation. And that's the case here. That's a purely technical thing. And the other thing is the usual reclassification work as part of annual reviews and things like that when a new rating is assigned to decline or to transaction or whatever. So that's it on the first point on property valuation. When I say, medium- to long-term perspective, now I would have abstained from giving exact figures on that. But what it means is, and I'll give you an example, which for the sake of easy calculation is sort of a domiciliation. If you assume EUR 100 million market value in 2019, and you say the property, probably -- the property value probably decreases by 20% in 2020, then the property value is EUR 80 million. Now if you go one step further to '21, and so you have an increase of 10%, then the property value is EUR 88 million. Now if you would define sort of looking through the cycle -- or over the cycle between these 3 years, then the -- over the cycle, so the midterm expected property value is EUR 88 million, and that's been applied instead of the one which applies to 2020. That's something which is in line with the suggestions and alleviations indicated by ECB to use the figure, which takes a long-term view or medium-term view and which reflects a situation where we see the property ending up in terms of value over time. And that's what we applied. Well, we do not -- we do not give out the exact deltas to that figure. It does alleviate the situation, but it's meant to alleviate the situation. But I hope, in principle, it's understandable what we do and what we mean. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- So next in line is Tobias Lukesch from Kepler. -------------------------------------------------------------------------------- Tobias Lukesch, Kepler Cheuvreux, Research Division - Equity Research Analyst [8] -------------------------------------------------------------------------------- Firstly, I would like to touch on that property valuation question again. So on Page 12, you outlined that, and you just gave that example. But how would this translate into P&L effects and capital effect, basically? So if you -- you don't want to give all the model parameters, I understand that. But maybe you can give us a bit more of flesh to the bone here. You also mentioned the U-type shift and the adverse scenario with property valuations down minus 35%. So maybe you can give us here some values with regards again P&L and capital, how they would work out? And secondly, on the development loans, you -- could you remind us of the default rates of these loans in the last crisis? And why this time, things look much better, basically? I understand it's due to the contracts, the covenants and so on. However, you just also mentioned the kind of technical unsecured exposure at the time that you have. Again, in a worst-case scenario, what kind of losses could result from these technicalities? And then on LTVs and the interest, the ISC. There are some reports that, for example, in yes, big mall -- malls can only collect rents in the amount of 16%, maybe 30%. But if I interpret the ISC of 300% correctly, you would just need 1/3 of rents being paid. So if that number is temporarily below that, how can then your customers make good for that? And how would you assess the situation as a whole? -------------------------------------------------------------------------------- Andreas Arndt, Deutsche Pfandbriefbank AG - Chairman of Management Board, CEO & CFO [9] -------------------------------------------------------------------------------- Okay. Just thinking of which question to take first. I think the one where I can say, least, I'll take first. I mean I -- to be honest, I can't really remember because I wasn't around what the default rates were last crisis of development loans. But they probably were not insignificant, judging by the general nature of it. I think what, in principle, is different to 2008, 2009 is 2 things. First of all -- or 3 things. First of all, from our bank's perspective, we have much tighter organizational and administrative measures around how we manage development loans. A large chunk of defaults of development loans in crisis comes from the fact that the administration of disposal of loans, the monitoring of progress, the monitoring of the fulfillment of conditions is done in a slack way. I would say if there were lessons to take from the last crisis, this is one. And this is where we have a extremely strict process behind that. We are pain in the neck for our clients when it comes to proper administration of the disposal of money and things like that. That's the first one. The second one is, in the past, we have done development loans only after very clear stipulations in terms of presale or pre-let plus equity. Usually, in the last crisis, you were happy to see an LTV of 18%, 19% or less than that on such exposures. That is much better nowadays, the loan to cost -- the loan-to-value is -- provides much more cushion of equity in such a transaction. And the third one is, we are strict on pre-let and presale. As I said earlier on, for those which are coming to market now, in most of the cases, we look at 100% pre-let or presale. So that gives you much more comfort that development is something which we will manage and will do good with. That does not exclude that we say -- we may see mishaps coming through the door. But structurally, those are the preconditions for having this business on our books. So that's one thing. The other thing is also, say, a bit more general thing to discuss. If you had malls which return only 20% or 30% of their usual revenues, how do landlords deal with that? Now the first point is, when you look at the way how we analyze our business, it is -- the first point is, is it a good property? What was it's property value and whatever? The second thing is, do we have a sponsor which is able to provide money when there's need? The third one is, what is the composition of the tenant structure? Now so -- or to take it the other way around, if the tenants do not pay up, it's the sponsor we go to. So -- and that's why we have covenants. This is why covenants mean either a covenant for cash drops. Whenever there's still cash in the operation, the cash is left in the transaction, all that equity is actually being provided. Now if that does not work -- and so far, we have the known cases in the U.K. where it does not work. But that's not corona-related, that's only anticipated by corona. If that doesn't work, we have to sit together and work out the situation. And this |
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Full Year 2019 Deutsche Pfandbriefbank AG Earnings Call Unterschleisseim Jun 2, 2020 (Thomson StreetEvents) -- Edited Transcript of Deutsche Pfandbriefbank AG earnings conference call or presentation Wednesday, March 4, 2020 at 10:59:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Andreas Arndt Deutsche Pfandbriefbank AG - Chairman of Management Board, CEO & CFO * Michael Heuber Deutsche Pfandbriefbank AG - Head of IR / Rating Agency Relations * Walter Allwicher Deutsche Pfandbriefbank AG - Head of Communications ================================================================================ Conference Call Participants ================================================================================ * Johannes Thormann HSBC, Research Division - Global Head of Exchanges and Analyst * Nicholas Herman Citigroup Inc, Research Division - Assistant VP and Analyst * Philipp Häßler Pareto Securities, Research Division - Analyst * Tobias Lukesch Kepler Cheuvreux, Research Division - Equity Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Walter Allwicher, Deutsche Pfandbriefbank AG - Head of Communications [1] -------------------------------------------------------------------------------- Good afternoon, and a very warm welcome from Munich. Thank you very much for making yourself available for our Full-Year 2019 Results Call. And rest assured that we appreciate your continued interest in PBB. Here with me is Andreas Arndt, our CEO. And Andreas will lead you through the presentation. And after that, he will be available for your questions. Andreas, please go ahead. -------------------------------------------------------------------------------- Andreas Arndt, Deutsche Pfandbriefbank AG - Chairman of Management Board, CEO & CFO [2] -------------------------------------------------------------------------------- Thank you, and also good afternoon and good morning from my side. Good morning to those who are dialing in from further far, and welcome to our analyst conference regarding 2019 annual results. Before I dive into presentation and results, please allow me a few introductory remarks, so to speak, an introduction to the introduction. It is not easy to strike the right balance in messaging these days. It's not easy to find the right balance between being wholly pleased with our 2019 results and our ambitious guidance for 2020 on one hand and the pile up of concerns on the other. On top of our normal daily worries such as trade war, political risk, environmental things, variation with macroeconomic slowdown, regulatory changes, new technologies and so on, there now is corona presently. And in the context of things -- in the context of European things, it seems to be serious but manageable so far. At least from a PBB perspective, no direct detrimental effects were observed. Not from our staffs' perspective, neither from our clients, if you discount for some canceled conferences and meetings. But it may change rapidly, and we need to be prepared. And I think we are, and I do not mean the housekeeping work to protect our staff, which is of utmost importance and which we do. I mean the housekeeping from the business point of view. We have been working the last couple of years to position the bank on the risk conservative side of commercial real estate with good quality in assets, reliable and match funding and steady earnings. And whatever comes, we want to keep it this way. Today, I presented to you the best operative result of PBB since IPO. We show what you may call a reasonable share price performance. And it is very reasonable if you look at the performance of last year, and it is still very reasonable if you look at the time spent between IPO and today, even if you discount for the last few days. And the third point is commercial real estate markets and the fundamentals bode well, thanks to low or negative interest. But, and that's a big but, but we believe that with cap rates of 2.5% to 2.75% and an earnings multiply of 36 and 40x net revenues for prime locations, the ebbs become more significantly less and the downs visibly more. The commercial real estate cycle is running into its 10th year, and that's already far beyond the normal range and age. And the geopolitical and economic risks are on the rise. Against this background, I think it's right, and we're doing the right things to further fortify earnings and balance sheet. We do that by following a 3-pillar plus 1 foundation approach. First is focusing on stable operative results while taking anticipatory risk provisioning measures. This is what we have done in 2019, in 2019 results, without sacrificing bottom line. On the contrary, we have even increased profit guidance despite higher risk provisioning. And we aim at the same level of risk provisioning for 2020. Second, further fortifying the bank's capital base, as we have guided over the last 2.5 years, by fully assuming and translating risk model changes related to ECB or targeted revenue of internal models and new EBA guideline into risk weights, which we expect to be Basel IV-compliant levels. And that's anticipating the future risk standard ahead of the curve with the CET1 level, which is higher than what most of our European peers show prior to the Basel IV. And the third point is focusing on profitable but risk-conservative new business by maintaining our selective approach with, again, moderate levels of new business production in 2020. And the fourth point really, as a foundation, is we cannot stand still. We need to foster innovation and efficiency, and we will continue to invest also in 2020. All this should and will translate into a very satisfactory and ambitious guidance for 2020, with PBT of EUR 180 million to EUR 200 million, which is lower than the 2019 results, but higher than last year's guidance which, as you remember, we put at EUR 170 million to EUR 190 million and which we gave at a slightly less constrained circumstances. We take this approach in order to remain a stable, a reliable dividend stock with the intention to pay out, again, 75% of our net earnings to our shareholders, which would help -- this would help to support a durable, attractive dividend yield also in future. And with that, let me turn to 2019 results and to the page, which is headed -- Headlines -- Highlights, sorry, Headlines and Highlights, which is Slide 4 to make it more precise. As already said, for 2019, we show strongest operating performance since IPO with a PBT of EUR 216 million. This is slightly above against and slightly above already strong last year's figure of EUR 215 million. It's clearly above, as already said, against our initial guidance and while having taken anticipatory measures in risk provisioning in Q4, stabilizing the bank for market challenges to come. So what have been the major drivers -- apologies -- what has been the main drivers in 2019? Now first, NII holds on high level and is even a little bit further up year-on-year, which is mainly due to effects, which you well-known, and that is the increase of your -- of our real estate financing volume by the average REF volume by EUR 1.6 billion and further reduced funding cost. In addition, we saw higher prepayment fees in 2019. It is EUR 39 million, which compares against EUR 16 million, which we had the year before. The second point is already mentioned. In the risk provisioning of Q4, we took anticipatory measures reflecting our increased cautiousness because of higher macroeconomic risks. Here, we are talking about what you may call or we did call in the past general provisioning in Stage 1 and 2 volumes. And in addition, we had some further additions on revaluations on U.K. shopping centers. The topic well-known to you, but higher specific provisioning requirements came -- became evident around year-end. And the third point is general admin expenses were slightly up -- was slightly up as expected, especially driven by investments into future and regulatory projects. Q4 was in line with expectations and was already communicated that we expect a higher line to be seen in the fourth quarter. New business, despite continued high competition, reached a good level of EUR 9.3 billion for the bank as a whole, of which EUR 9 billion to be allocated to Real Estate Finance, thus exactly meeting our guidance, which we put between 18.5% and 9.5% and thus reflecting our selective approach, not least the reason that we have been able to keep the gross margin stable at 155 basis points. It is the third year in a row that we reduced new business now without sacrificing portfolio growth. The strategic portfolio is slightly up by year-end figures, EUR 300 million, whereas the Public Investment Finance portfolio remains almost stable and the Value Portfolio has run down according to schedule. Funding activities were very successful with EUR 6.7 billion placed to markets after EUR 5.2 billion last year -- the year before last year in 2018, which I think is record levels for the bank. And the important thing is even though funding spreads in markets observed, as spreads went up significantly, the average issuance spread stays below maturities, thus supporting NII, the average maturities, which come off a higher price than the ones which we add back by new issuances during the course of 2019. As expected and as already communicated, third quarter RWA are up in Q4 to EUR 17.7 billion, which compares with EUR 13.6 billion half year and EUR 14.3 billion third quarter, due to the risk parameter recalibrations in view of the various regulatory requirements from ECB and from targeted review of internal models and EBA guidelines, resulting in the calibration of risk weights around expected Basel IV levels. And with this, we are, I think, in line with the expected and communicated range of additional RWA in the amount of net EUR 4 billion to EUR 5 billion. And we're anticipating future risk standards ahead of the curve. And finally, we land on a CET1 level, which is higher than those of most of our European peers prior to Basel IV. All in all, with the CET1 ratio of 15.2%, we land above the forecasted level, which we gave, I think, last time between 13.5% and 14.5% and remains strongly capitalized, providing for operating strategic flexibility. We want our shareholders to profit from our good performance, thus management will propose a dividend of EUR 0.90 per share or a payout of 75%, which is in line with our dividend policy. Relative to market, this provides an above-average dividend yield of roughly 8% -- 7.9% based on average prices for 2019. And for 2020, to close on that, we confirm our current dividend policy with a payout of 50% regular dividend and 25% supplementary dividend for the next 3 years, i.e., 2020 to 2022. Despite a more cautious view on markets and expecting risk positioning on the same level as 2019, we aim for another good result of PBT of EUR 180 million to EUR 200 million, which you may easily remember, is above last year's guidance of EUR 170 million to EUR 190 million. Now Slide 5 usually is my favorite illustration, because it gives a good overview of the yearly and the quarterly development, but I make it short, because I've touched already on a couple of points. New business development, which is upper left-hand chart, reflects, I think, very well our selective business approach. Moreover, it shows for the first time, an even spread of new business production across the year, which I think did help the organization very much to manage a substantial workload on a more even and more balanced basis. Portfolio development, which you see on the bottom left-hand side, reflects our strategic focus, moderate growth for real estate finance. A little bit disappointing from my view in terms of year-end figure, because there were significant prepayments right before Christmas, which we could use nicely also in 2020. So we landed on EUR 27.1 billion by year-end. Our Public Investment Finance, as communicated as a whole proposition and as a reflection of last year's rescheduling of the business, practically under the Paris team, actively pursues new business on a moderate scale, but quite successful, I must say. And ECA covered loans and loans to regional governments were, by and large, unattractive and therefore out of scope presently. And Value Portfolio, as you know, runs down on schedule. NII and NCI, as I said, holds up nicely and has somewhat recovered from the heavy reduction in carry of the Value Portfolio in mid-2019. Risk costs, I mentioned, including anticipatory measures, I'll come back to that in a minute. And operating costs are almost back to 2017 levels as we did expect and as 2018 benefited from some releases, therefore. With all that, I think we show good operative results and a pretax profit, ROE, of almost 7%. Let me turn to Page 7 or Slide 7 and go into some remarks on markets before we go into more detail on the P&L. All in all, and that's the remarkable thing, the market environment both in Europe as well as in the United States remained quite supportive. The low interest rate environment continues to support and to prolong the commercial real estate cycle and keeps up demand and investment volumes. Prime office yields continue to offer substantial pickup against over 10 years government bond yield, which amounts to something between 2%, 2.5%, 2.75%, and therefore, still is substantial. Across most markets, we see a solid takeup -- still solid take-up levels. We see low office vacancy rates. We still see increasing office rents in most of the markets. And in 8 out of top 25 European markets, 8 of them posted record investment transaction volumes. And of the top 7 markets, London and Frankfurt were the only ones where investments fell in 2019 against 2018. Paris, at least for Europe, Paris has dethroned London as the strongest transaction point in Europe, and the unprecedented performance of Berlin, Madrid, Munich and Stockholm show how much money is in the market. But again, a big but, we also see yields for prime office properties are at historical lows, topic which we discussed a number of times. Historical lows in most of the markets with subsequent valuation risks. B, while U.K. office yields remained more or less stable, investment volumes dropped by 1/3. C, U.K. retail property yields increased with proportional pressure on valuation, which is something, which you can also visit and see in our books. And the last point, d, we see an increasing probability of an overall economic and sector-specific slowdown, especially triggered by individual market developments, such as Brexit; structural changes in retail sector; co-working space; currently, the corona issue and so on. And last point on the list. IMF just recently lowered its growth projections for 2020. So in a nutshell, low interest levels still support demand, but macroeconomics will take over some time, and the only question is when. The future pain points to observe structurally and to be aware of, besides macroeconomics and valuation risks, which we discussed, the future points to -- pain points to observe are. First, emerging new standards for carbon footprint and green buildings definitions with potential impact on valuation of brown and nongreen buildings. And we can discuss this later on, but that's certainly something which is coming up. Second thing is nobody, at this point in time, can evaluate the corona effect, who is especially impacted -- special effect on traveling on hotel, retail, conferencing and on the world economy at large. And the third point on my list is new regulation on rent caps, which is not a phenomenon only in Berlin and is not yet enacted, but is also something which we see in New York, and would still wait and would still expect also for other places to come at some point in time. So all that is enough reason for us to stay highly selective to continue to focus on quality to remain especially cautious in the U.K. and on retail and currently on hotel business and to make sure that we make PBB even more weather-proof. Now Page 9, financials. NII risk provisioning and general admin will be visited in more detail on the next pages. So I confine my remarks on fair value measurements, which is at minus 7 and more or less stable and uneventful. You know this is, on the negative side, always influenced by the negative pull to par, which stands at EUR 18 million for the last year and was positively influenced by positive interest rates, rate developments driven -- sorry, by positive interest rate-driven valuation effects on stand-alone hedges and syndications and by positive credit-driven movements on some of our value bonds, on the other side, related to liquid book and the Value Portfolio. Other operating result were EUR 3 million is uneventful, so I will not comment on that and depreciation. The only thing I should mention and to recall what we have said before, it's driven by regular depreciation and includes, since 2019, depreciation on lease rights according to IFRS 16, which is the -- is an important matter for us as we moved to our new head -- or released new headquarters closed by Munich mid of year. And since then, we have to submit it to IFRS 16 standard. After-tax profits or net income is stable at EUR 179 million, given the marginal higher tax rate at 17.1%. While net income is unchanged, ROE and earnings per share turned out slightly lower compared to last year. This is because of the fact that we had to include AT1 coupon for the full year this time at EUR 17 million. Last year, when we did issue the AT1, it was in April 2018. And for that part of the year, we only paid EUR 12 million. So there's a EUR 5 million add-on, which is to be deducted. Now NII, a quick view on NII. It's well-known to you. Structurally, it is more or less unchanged in terms of impact factors against what you have seen last quarter and the quarter before. The average strategic portfolio grew by in handsome of EUR 1.6 billion, overcompensating for slightly lower average Real Estate Finance portfolio margin and the scheduled rundown of the Value Portfolio on the other hand. NII continues to benefit from flow income as the interest environment continues to stay negative. While in principle the bank holds a very favorable position in terms of flows, i.e., having flows on the right side of the balance sheet, which in this case is the left side of the balance sheet, because it is the asset side, which counts. The bank, like all banks, experienced increasing pressure on the flows, while clients insist to lower flows into negative territory. We tried to resist that, but 0 flows to be defended is a difficult exercise presently. And the third point is, as before, low or negative interest lead to visibly lower income from the equity and liquidity book, and it was assessidated -- in June 2019, this was assessidated by the maturity of high-yield bonds in Q2. Even though, and that's the fourth point on the list, even though funding spreads have increased in line with overall spread widening in the market year-over-year, we continue to benefit from a further reduction in average funding cost as new issuance spreads stay below legacy cost of maturities. In the low interest rate environment, we benefit from the fact of being a wholesale funder or wholesale capital market participant. In total and summing up all effects, average total portfolio margin increased slightly, reflecting the increased share of the strategic portfolio, while liabilities support NII through relative spread advantages from new placements. A word on realizations, which stand at EUR 48 million and mainly and mostly reflect higher prepayment fees, which we accounted for to the tune of EUR 39 million after EUR 16 million in the year before. That did partially overcompensate the low realization fees, which stand at EUR 9 million for the actual year 2019. The second noteworthy item on the list is risk provisioning on Slide 11. The 2019 risk provisioning of EUR 49 million reflects 3 major effects. First one, on one hand, we undertook anticipatory measures in the portfolio provisioning in Stage 1 and 2, accounting for an expected worsening of market conditions. And that's the important thing. We added EUR 31 million gross, of which EUR 20 million stem from higher scenario weighting of the probability of an economic downturn and EUR 11 million from using extended and broader range of underlying historical data, resulting in an adjustment or recalibration of PDs and LGDs. And the second point is against that, and we're still talking about assets on Stage 1 and 2, against that, the EUR 31 million gross were partially compensated by releases from maturities and LGD improvements, especially on Southern European bonds, and that was to the tune of EUR 15 million. And the third point is related to Stage 3 assets. Furthermore revaluation of U.K. shopping centers resulted in a EUR 15 million increase to the reserves compared to last year, i.e., EUR 33 million in total against EUR 19 million in 2018. 3 new cases and 1 successfully restructured case. All these cases, they fit into the scheme, which we discussed last time. They're valuation-driven, and there's no payment default. On the contrary, they uphold decent interest coverage ratios and debt service coverage ratios. So with that, the Stage 3 coverage ratio is down to 11% from 18% due to new additions with low coverage. However, we should point out -- I'll come back to that in a minute. We should point out that this includes 100% ECA -- Euler Hermes AAA-covered -- ECA-covered loan on EUR 97 million without provisions. The adjusted coverage ratio, if we take that out, would find itself at a level of 14%. With that, I'd turn to Slide 12, operating cost. As expected and as we did communicate, operating cost are up in 2019 up to the level of EUR 202 million. And that's back -- almost back to 2017 levels, as you could see on one of the earlier pages. This is broadly in line with the expectations as 2018, and that's something to keep in mind, did benefit from some provisioning releases. So we're basically taking EUR 199 million to EUR 202 million relatively steady path. Personnel expenses are up by 2.6%, while FTE numbers are relatively stable, only small fluctuations. And if you compare 2017 to 2019 levels, personnel costs were almost flat. That's important to mention, because the inherent wage drift of 2.5% per annum over the last 2 years, plus personal investment in our strategic initiatives such as United States business, CAPVERIANT and digitalization, were largely [sculpted] by our restructuring measures under focus and invest. So we try -- as much as we can, we try to level out what we invest into restructuring and restructuring measures on run-the-bank issues. Nonpersonnel expenses increased to EUR 84 million, that's EUR 5 million up. The increase is above plan, I regrettably have to say. It's clearly attributable to regulatory projects, and it should result in some alleviation in 2020. Those were costs, which came up in last quarter 2019. All in all, we are aware of the need to keep costs under control. 43.5%, cost income ratio is a good result in 2019, but also a target figure difficult to repeat and to achieve in 2020. And therefore, for the second half of 2020, we will have to look into efficiency measures in the course of the rest of the year. Capital, Slide 14. Capitalization remains strong. As already communicated with third quarter results, as per year-end, we now increased risk weights to the expected future regulatory level of Basel IV. Strategically, we pursue 2 effects. The first one is we anticipate the effect -- the expected effect of Basel IV on our strategic portfolio by applying recalibrated LGDs, taking into account the ECB or targeted revenue of model and requirements and the new EBA guidelines, which then leads to risk weights that are in line with future, be it on the expected future Basel IV levels. With the Basel IV legislation coming to the EU Commission this year, we are 2 years ahead of the curve and anticipate what comes anyway. We have more transparency on our long-term capital requirements. And finally, we are building in more margin of conservatism calibrated on over-the-cycle parameters that's giving more resilience to RWA oscillations over time. And the second important point I want to make in this context is, at the same time, we agreed or we received permits to transfer parts of the portfolio into a standard approach, the so-called PPU, the Permanent Partial Use, which predominantly affects the public sector and FI or financial institutions assets. With that, we do not only release RWA from the public sector portfolio, but get on to level playing field with our peers who have widespread application of PPU, which we had not before. And therefore, 0 risk weighting. And they had it since some time, and we have it now. And again, the other point is we, again, reduced stress-induced RWA oscillations. All in all, this is a balanced anticipation of regulatory requirements, which are coming on our way. The result is, so to speak, a fully loaded capital ratio, CET1, in the range of 14.5% to 15%. In fact, it is 15.2% by the end of the year, after dividend and after profit retention. And thus, as already mentioned, probably a better ratio than some of our peers may show prior to Basel IV adoption. For the sake of completeness, also the hint that the SREP requirement for 2020 remained unchanged at 9.5% and 13% for own funds. However, the anticipated countercyclical buffer increased from 35 to 45 basis points. With that, I come to Page 15 and 16, which deals with the dividend. Management intends to propose a dividend of EUR 0.90 per share to the AGM for 2019, which is in line with our dividend strategy, which defines a payout of 75% based on profit after tax and AT1 coupon. The net profit basis, as I have already mentioned, is slightly lower than last year. It's EUR 162 million against EUR 165 million because of this AT1 issue, with the difference between straight 50% plus 25% payout in total distributed amount versus 50% plus 25% on guidance plus 100% excess over guidance, turns out to be marginal, we decided to remain with a straight solution. In addition, a slightly more cautious computation that fits the bank overall -- the bank's overall and more cautious stance in difficult times. And at the same time, the bank underscores its conservative positioning and reliable continuity by holding on to its rather generous policy -- dividend policy with a 7.9% dividend yield based on average price for 2019. As we want to remain a stable, reliable dividend stock, therefore, we confirm our dividend policy with a payout ratio of 50% on regular and 25% in supplementary dividend for the next 3 years to come until 2022. Of course, it goes almost without saying, of course, also this dividend guidance is under the provisor that any distribution subject to economic viability to the overall macroeconomic and the commercial real estate markets development and regulatory demands and needs, if they should arise, and as such, it is subject to the regular review anyway. Let me turn now to new business on Page 18. In a challenging market environment, new business volume reached a good level of EUR 9.3 billion, as already mentioned, with EUR 9 billion predicated on Real Estate Finance, and thus, exactly meeting our guidance, which we placed between EUR 8.5 million and EUR 9.5 million. It reflects our ongoing selective approach. Being selective has also helped us to keep average gross margin stable at 155 basis points with a positive development throughout the entire year and without compromising on the risk side. What you see on the top right-hand side is that LTV on new business is even down from 59% to 58%. And as you may also remember, we started with 135 basis points -- or 130 basis points in the first quarter. But the following quarters, by returning to the usual profile, which we had, we were able to catch up. And I think it's a very gratifying result of last year's origination endeavors to close up with the levels which we had on 2018. With regards to regions and properties, we continue with our risk conservative positioning. Most important market remains Germany with 47% share in new business versus a portfolio of 50%. And with regards to property types, our focus remains on office properties for the share of 50% versus portfolio of 46%. U.S. business became second largest single market with a new business share of 15%, while accounting for 9% on the portfolio. And as mentioned, we stay cautious regarding U.K. business as a whole, which decreased to 7% in new business and 12% on portfolio. You may keep in mind or you may recall that 2 years or 3 years ago, the new business production and portfolio share were around 18%. And we stay cautious towards retail properties with 12% in new business and 16% on the portfolio and remain particularly cautious also on the specific spot where retail property meets U.K. On segment reporting, Page 19. With regards to segment performance, I can keep it rather short. In general, the segments reflect the developments on a group level and the strategic approach to each segment, Real Estate Finance on moderate growth, Public Investment Finance on hold and Value Portfolio in run down. It is, however, noticeable that contribution margin from Public Investment Finance and Value Portfolio still remain significant with a combined NII of EUR 68, million, which is 15% of the total EUR 458 million NII of the bank, but -- and that as it goes on a reducing base on a reducing rate and now with less RWA consumption due to the PPU execution into standard approach for the public sector assets as of December 31, 2019. Further information and details, as usual, you'll find on the annex. One word about capital allocation. Capital allocation, of course, will change as more risk weights are shifted to the Real Estate Finance portfolio or segment. However, we will not turn to a completely RWA-based allocation of total capital, but will, as before, calibrate segmental capital allocation around economic capital as been calculated under Pillar 2. While RWA or Pillar 1 is important, economic capital remains important under Pillar 2 and remains the scarcity factor in future, especially in the light of the discussion around AT1 recognition or derecognition. Now coming to Page 20, which is on the portfolio. The average LTV on new Real Estate Finance business came down, as I said, from 59% to 58%. And likewise, the LTV on the bank's Real Estate Finance portfolio bank book decreased from 54% to 53%, with no major outliers when you look at the regional split. The message here is, I think, quite frank and simple and straightforward. The underlying factors, which drive the bank's intrinsic risk profile, remain intact. That goes for LTV on new business and stock, which came down 5% over the last 5 years, and it continues [so]. That goes, likewise, for other typical risk drivers such as ICR, interest coverage ratio, or debt service coverage ratio, which show a very stable development, which we don't show here, but that's what I tell you. And that goes, likewise for the stability and quality of contractual conditions or, what you call, the covenants, which we believe to be -- to remain intact and sound despite noticeable pressure from markets. And so far, the moderate shift in expected loss base investment-grade classification for real estate funds, on the top right-hand side, is a technical movement as it is the result of model recalibration of risk parameters, which I explained to you earlier, now which translates the fundamental risk drivers, i.e., the LTV and others into calibration parameters for the bank's capital requirements. The result is, as we have seen and as we have noted, higher regulatory RWA. But it does not mean that it is also intrinsically higher risk. The risk profile of the bank and the bank's approach to risk is unchanged. With that, let us turn to Page 21 on the portfolio. NPLs are still very much a U.K. topic with 3 new additions in Q4 and a total of -- sorry, 2 additions in Q4 and 4 new additions to 29. All those were in-facility, in-focus before, and none of them is work out. So it's restructuring loans, which we look at and which we have discussed a couple of time. And there are 3 remarks I want to make. First of all, the new additions are revaluation-driven only, triggering LTV thresholds, and there is, as I said, no payment default. And there is also one successful -- there's a couple of successful restructuring cases, which basically means that EUR 218 million left the bank, property being sold, restructured or done away with. That's the second remark I wanted to make. And the third remark is that the figure encapsulates and includes 100% ECA-covered loan, Hermes-covered loan, AAA-covered loan before an aircraft financing, which is fully guaranteed by Hermes where we have no NPL needs or no provisioning needs. And that it is important to note that the transaction has already been successfully restructured, but it's still what we call in (inaudible), probably the right translation is probation period, and therefore, it still shows up here but is expected to go out and to leave the bank's book by -- or within this first half of 2020. Workout loans are unchanged at EUR 15 million. And as we come from very low NPL volume, we now show an NPL ratio of 0.9%, which is still, I think, can be considered as a low level. If you take out the EUR 97 million for the Hermes-covered loan and other things being equal, we would land at 0.7%. Funding. Funding widespread area with lots of activities, a significant increase in volume. I think a very successful placement activity -- placement activities in 2019 to the tune of EUR 6.7 billion, which is EUR 1.4 billion more than last year, meaning 2018. And in terms of quality, 2 things are noticeable. First of all, much higher share of foreign currency, which is good and deliberately sought after; and a much higher share of senior unsecured preferred issuances, which we brought to the market. Pfandbrief banking -- sorry, Pfandbrief funding stands at EUR 2.9 billion issuances, dominated by benchmark issues, of which EUR 1.6 billion were 2 benchmarks plus 2 taps on mortgage Pfandbrief, $650 million on U.S. dollar with 1 benchmark and 1 tap. And we also issued in Swedish kroner SEK 3.7 billion, which sounds a lot, but in euros is something around EUR 350 million to EUR 370 million. It's still a lot for Swedish kroner, I must say. Senior unsecured stands at EUR 3.6 billion issuances. We concentrate on senior preferred and issued EUR 1.3 billion in euros benchmarks, something in Swiss franc, something in British pounds, and in addition, which is remarkable, EUR 1.6 billion in private placements plus something SEK 2.5 billion in Swedish kroner as well in private placements. That's good, because that's customized business. It's cheaper business and is a longer duration business. As I said, funding and currency results in natural FX hedges on our lending business in foreign currency and therefore reduces the need for FX swaps, which we find preferable out of cost reasons. Why did we have more funding needs than last years? The answer is easy, it goes with maturities of the year. And why did we have less Mortgage Pfandbriefe and more senior unsecured? Again, it goes along with the maturities, which, by the way, on senior unsecured are shorter than on Pfandbriefe. And it goes along with optimization measures and funding mix related to retail deposits, which we -- where we took levels down a little bit further. As I mentioned right at the beginning, even though funding spreads have increased, you can see that also on Page 24, I think it is or 20 -- yes, 24, have increased. Average issuance spread levels came slightly down during the year and continued to be below maturities. It is Pfandbriefe/Mortgage Pfandbriefe at 15 basis points now and 74 for unsecured preferred based on the -- well, mostly and basically, on preferred levels. What you can see from that chart, it is all about timing. And while 2018 spreads levels widened significantly, 2019 shows an inverse development by tightening. Unfortunately, our sort of funding time is mostly the first 2 quarters of the year, and that did influence the comparable levels for 2018 for the first 2 quarters at very low levels on that side and pretty high levels on 2019 for the first 2 quarters, where the bulk of funding activity did take place. But I think and I hope the good news is that 2020, we start again on low levels if things sort of peter out correctly. At the end, a couple of words about strategic initiatives, of which most of you, I think, are fairly familiar with. So I'll make it hopefully straightforward and short. The more the uncertainties, the more the need to innovate and to invest. Since last year, we made digitalization a key initiative of the bank. And this year, meaning 2019 and 2020, we added a sustainable or green finance to it. Digitalization is not really a new initiative, but it is and it will be one of our most important initiatives for the future of the bank to create a digital organization that takes advantage of agile methods. We know -- you know that we follow 3 main fields of action. One field is about customer interface. We focus on the development and implementation of our client portal, which innovates and digitalizes the interface between PBB and our customers. And we are on good track there and likely will go to market second half in 2020. The second point is efficiency, focusing on optimization of internal processing using more standardized processes straight for data handling, robots and artificial intelligence. And the third point in the row is products and services. Here, we concentrate on creating resources of income. For the innovation and implementation, we have defined a number of workflows, which I leave to your reading, except for one. I want to make a few comments on CAPVERIANT. We launched it 2018. As already known to you, we launched it as a corporate startup, a fintech within the bank. And it's the PBB's first concrete implementation of a digital business model. It is up and running well. We're covering now the German and the French market. We see significantly substantially increased financing requests and client onboardings, and we are looking forward to a further good and well development -- good development in 2020. The message here is we innovate under our own control, under our own management and our own strategy and cost control. The alternative is to buy shares in other fintech companies by 10% here, 25% there, with a limited range of influence and a limited impact on that. We prefer to take a view on our own. We take -- we prefer to have influence on the strategic setting of such initiatives ourselves, and we have definitely an interest in profiting from these initiatives for the bank with our own efficiencies. The second big initiative and this initiative, which will grow certainly and for sure over the next months to come, is sustainable finance and green finance. We launched a project, which aims to identify green buildings in the bank's portfolio and the bank's new business. Working group is currently in the process of identifying adequate criteria to find and classify properties as green when they -- when and where they are green. And this will also be, I think, a suitable and necessary basis for the issuance of green bonds. And so in parallel, we are working on a green bond framework, which is something which we intend to bring to market around the end of the first half of this year. As a consequence and also for regulatory reasons, 2020, we will focus on building up a database with regards to ESG or green criteria for the loan portfolio, including carbon emission data. Outlook, 2020, Slide 26. And that's sort of to close the circle of my story on the operative side. And as mentioned already in my introduction, we will continue to focus on 3 pillars. And the first one is focus on stable operative results, including increased risk provisioning levels. All in all, we aim for a stable development in NII, general admin expenses and risk provisioning for 2019. We -- however, support from realization fees will be somewhat lower. All in all, that should translate in a satisfactory guidance for 2020 on a PBT of EUR 180 million to EUR 200 million, which admittedly is lower than 2019 results, but higher than last year's guidance. The second pillar in that building is fortifying -- further fortifying the PBB's capital basis, as described, by adjusting risk weights to requirements of Basel IV and EBA. And this anticipating future standard is already ahead of the curve, which should provide us with higher resilience against market-driven fluctuations of risk parameters and still leaves us as depicted with a strong capitalization level. The third point, focus on profitable but risk conservative business. We expect commercial real estate markets to stay highly competitive and challenging. Furthermore, economic and sector-specific risks have increased in 2019. This gives enough reason to continue our selective and conservative path with guiding on Real Estate Finance new business to the tune of EUR 8 billion to EUR 9 billion and slightly lower gross margin, remember the 155, which I set out for 2019, and hoping very much that despite this guidance, we undertake whatever it takes in order to -- not whatever it takes, but whatever we can do in order to stay close to the 155. And all that is framed and based on further progress in innovation and digitalization. The reading of the more detailed guidance, which follows suit on Page 27, I will leave to you. With that, I conclude with many thanks for listening in, and I'm happy to take questions when you have them and if you have them. Thank you very much. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Walter Allwicher, Deutsche Pfandbriefbank AG - Head of Communications [1] -------------------------------------------------------------------------------- Thank you, Andreas. We have so far registered one question. (Operator Instructions) First question comes from Nicholas Herman. Nick, please go ahead. -------------------------------------------------------------------------------- Nicholas Herman, Citigroup Inc, Research Division - Assistant VP and Analyst [2] -------------------------------------------------------------------------------- Three questions, please. One on margins, one on provisions and one on capital. So firstly, on margins, you said at 3Q '19 that, I think I remember correctly, you were the most positive on margins in Real Estate Finance than you've been in years. You're guiding for slightly lower REF margins in 2020. What's changed there? Secondly, on provisions or IFRS 9. Just trying to make sure I have a proper steer on this. Is that as of 31st of December as the situation was then? Or is it as of 31st of December but forward-looking? Because clearly, coronavirus growth, the global GDP growth outlook, that only really deteriorated after the year-end. So just trying to get a proper handle of that. And then finally, on capital. I guess there's just that -- there's 2 parts here. First of all, it looks like your Basel IV other than your inflation was at the bottom end of the guided range. Did anything change there? In addition, with the 12.5% minimum CET1, that would imply about -- or just under EUR 500 million of surplus capital, and that's already after a management buffer over a regulatory requirement -- or a management buffer over the regulatory requirements of over 250 basis points. Now some of your German peers have informed us that as of start of 2021, they'll be able to fill a good portion of that pillar to our buffer with AT1 and Tier 2 capital. This is the ECB article 1041 A. I mean do you need to optimize your capital structure to benefit from this? Your [PT] was 2.5%. You couldn't really get a benefit to your CET1 requirement over that 1% or over. So I guess -- and a part of that, would you seek to also increase your management buffer to 350 basis points plus? Or would you keep your original minimum CET1 come down accordingly? And I guess, in that context, if you could finally just talk about your capital management policy, given the size of the extra capital? -------------------------------------------------------------------------------- Andreas Arndt, Deutsche Pfandbriefbank AG - Chairman of Management Board, CEO & CFO [3] -------------------------------------------------------------------------------- Okay. I'll try, Nick. And if I sort of leave something out, you remind me. Now on margins, if I understood you correctly, your question was -- I mean, we were talking third quarter about some tailwind in terms of margins, margins getting better because of market situation, competitive situation, RWA needs in some other banks, the behavior -- the pricing behavior of institutions and so on. So why should we guide for lower margins in 2020? Now as I tried to indicate or to intimate, one thing is slightly lower margins -- gross new business margins, which we built into our plan for 2020 and '21 and '22. And the other one is sort of my personal expectations that the trend, which we discussed on third quarter, may hold out on fourth quarter and perhaps into the first quarter. While we leave the official guidance with what it is and as we depicted here on this Page 28, I should also say, my personal expectation is and my observation is from fourth quarter as much as from first quarter that this underlying trend, which I just have been describing, also continues the new business production as much as we can see. And as we can say, for the first quarter 2020, it's not only according to plan, but in terms of margins, slightly better than we expected. So I think this combination of the looming or the dawning inside of Basel IV implications and the doings of ECB in terms of risk models and all that is something which comes on to other banks as well, but to other banks on a basis where there is perhaps less room to maneuver to counter market challenges. So it leaves a trace in terms of pricing, and I hope it becomes a trend. The other point, which I also did explain last time, is with the very low levels of interest and the low base where institutional investors start from when they extend 10 years loan against 100 basis points basically does not provide enough carry for their investments and for their funds. And therefore, there is also a market-driven impact in terms of getting a better pricing done. So that's what I can say on margins, and I hope I sort of pinpoint the things which you had in mind. Now on provisioning -- yes? Okay. On provisioning, now I understood the question this way, whether sort of possible impacts from coronavirus have already been baked into our new risk levels for Stage 1 and Stage 2. I need to say no, because when we did the modeling and when we did -- when we put together the figures for 2019, coronavirus was nothing on the agenda. However, what I should say is it reflects a general attitude of cautiousness to the overall macroeconomic -- the further macroeconomic developments, and therefore, should also cater for -- to some degree, for any effects which may occur. Now we're -- in a way, in Europe, we're early stages on the virus distribution, and we still need to see what impact that has. And if there is a significant add-on necessary, we will address that in time. But presently, it does not reflect in the provisions as we have set up. I should add 2 more things to that. First of all, there might be a specific -- and I meant, first of all, the overall impact is a matter or is a function of time, so how long that whole thing will take. If it goes away rather quickly, I think we will see a general catch up in second and third quarter. And that's it. If it takes longer, we will have to reassess things, first point. The second point is there might be specific issues related to our business when it comes to retail, when it comes to hotels. Travel is impacted, obviously and evidently, but not so much our thing. And where it may come into our books is sort of on general economic terms. If economy goes down, it will affect tenants, it will affect sponsors as well. But for that reason, I repeat and reiterate the bank's positioning. We have always seen that we try to take risk conservative attitude, and that goes for 2020, even more so in terms of what property we finance, what is the location of the property, what is the transaction ability and the liquidity of the property and who is the sponsor. And that is something which does not go away. And that is something, which compared to, say, 10 years ago is vetted in another way. I think -- and we talked about LTVs for the portfolio now being down to 53%. That is contrasted by the figures, which were deemed to be conservative 10 years ago with an equity share in the transaction of 10% or 15% as being conservative. Now today's figure is, at least as far as we are concerned, 47%. And that means there's a lot of water under the ship before we actually encounter a problem. So that's what I wanted to say on provisioning, on capital? Well, yes. -------------------------------------------------------------------------------- Nicholas Herman, Citigroup Inc, Research Division - Assistant VP and Analyst [4] -------------------------------------------------------------------------------- Just one follow-up. And I'm just a bit surprised, because -- I mean I would have thought that the increased weight towards downside to not go would have happened because of -- looks like I've got a terrible echo. Yes. So I was thinking there would be a -- sorry. I think there's a static here. I would... -------------------------------------------------------------------------------- Andreas Arndt, Deutsche Pfandbriefbank AG - Chairman of Management Board, CEO & CFO [5] -------------------------------------------------------------------------------- Sorry, Nick. We lost you. Not in terms of... -------------------------------------------------------------------------------- Nicholas Herman, Citigroup Inc, Research Division - Assistant VP and Analyst [6] -------------------------------------------------------------------------------- If things were not that bad. -------------------------------------------------------------------------------- Andreas Arndt, Deutsche Pfandbriefbank AG - Chairman of Management Board, CEO & CFO [7] -------------------------------------------------------------------------------- Yes. Maybe we need like to take that off-line because, in a way, the transmission is not good. So if there's something, which is left over, we'll attend to that after the call. So I apologize for that. Now on capital. So my guess, on your point, is if we come out around 15% and if we have our present and unchanged guidance based on our own views at 12.5% and 9.95%, which is the SREP requirement, including the countercyclical buffer, is something where there's a delta to be observed. And then I'd tell you, you're absolutely right, but I can give you only the same answer, which I gave in this respect also in the past. I don't think it's time for capital measures. I think it's time to keep the ship tight to fortify the capital. I don't think, by the way, that the supervisory bodies would be happy to release capital in these circumstances. And I think we've discussed a long chain of things, which may cause adverse market movements. And those are all good reasons to keep the capital where it is. And that is even the more so that we do have more resilient levels of risk-weighted assets or risk -- recalibrated risk parameters. But still, if there's a major change in the market and more riskiness to be observed, we would still see that in the risk levels or the capital requirement levels as we go forward. And I think we need to stay this course. Good. Any other questions? -------------------------------------------------------------------------------- Walter Allwicher, Deutsche Pfandbriefbank AG - Head of Communications [8] -------------------------------------------------------------------------------- We have a further question registered from Tobias Lukesch from Kepler. Tobias, please go ahead. -------------------------------------------------------------------------------- Tobias Lukesch, Kepler Cheuvreux, Research Division - Equity Research Analyst [9] -------------------------------------------------------------------------------- Yes. Three questions from my side as well. First on -- I have to touch on capital again on the EUR 500 million excess capital that we see on the core equity Tier 1 ratio. From -- with regard to the 12.5% threshold, I mean you mentioned that you're also looking more into the Pillar 2 requirements. So could you give us maybe a sense how much of a capital cushion you have based on your Pillar 2 calculations and maybe also what kind of core equity Tier 1 ratio you might see at year-end 2020? What kind of RWA increase you derive from your organic growth and the portfolio growth that we see? Where will the REF portfolio stay at 2020? And what's -- into what kind of leverage ratio will this translate? Secondly, if we talk about the REF portfolio, what is the impact of syndications? What was the effect in 2019? What do you expect for 2020? And what is the P&L impact here? And lastly, on the risk side, I mean, looking at the cost of risk you generated basically and really just looking at the REF portfolio, would you say that with all the cautiousness that was applied in Q4 and for 2019 that we have seen a kind of through-the-cycle cost of risk number, which is very likely not to increase in the coming years? -------------------------------------------------------------------------------- Andreas Arndt, Deutsche Pfandbriefbank AG - Chairman of Management Board, CEO & CFO [10] -------------------------------------------------------------------------------- Okay. Good. On three, I may return the question to you, but I'll start with -- I'll try to start with the CET1 and Pillar 2 requirements. Now I think -- and we'll have to check that. We have not really communicated Pillar 2 requirements. The point in discussion is the role, which going forward AT1 will play in this, defining the capital buffer against the economic capital calculation. And two things are important on that side. One is the -- I mean, where does the discussion come from? The regulator contemplates to deregister AT1 as part of the capital buffer over the economic capital, which is an astounding and strange discussion, as I may say, because at the same time, there's discussion going on that AT1 may be allowable under CET1 definition. So that's something, which goes in contrary directions and needs to be sorted out. But the derecognition of EUR 300 million AT1 in our case would certainly be not amusing. And that's one of the reasons why we have to keep powder dry on that side. The other thing is why we steer more, according to Pillar 1, RWA on a more stable basis after recalibration of risk weights. We also have to acknowledge that for Pillar 2 requirements, economic capital is still calculated under the old RBA parameters, with more oscillation and more flexibility, more volatility behind that. So in that respect and assuming that future stress tests will become even more severe and that future real stress in terms of economic downturn will also take its toll, is something where we presently have good and sufficient buffers under Pillar 2. That is certainly also something, which we define as our level of scarcity going forward and closely observe. Now that's my remark as much as I can make on your first question. On the second one, you're basically touching on a core question, which everybody in the market is discussing presently. If you move from risk weights in the past, as we did show them and as most of our competitors did show them around 20% to 25% on the Real Estate Finance portfolio to a figure, which is significantly higher, around 40%, 41%, 44% or whatever. But the question is how capital efficient is the business? Now in our case, this does not result in new capital requirements, as you could see from 15.2% CET1. But what it does, in many other cases, it works on capital scarcity, and it should, in any case, do 2 things. First of all, it should increase the price for on balance sheet business. And secondly, it should foster or push for more syndication activity and more platform business. The question is how will this come? And when will this come? We are preparing ourselves for that. We have a loan markets entity, which is very active in syndication markets. And we can gear this up any time, and we want to be more active in this market, always keeping in mind, and that's part of the explanation of the reluctancy in the market, that a syndicated loan, a loan which is syndicated out, you have a one-off in terms of provision, which you keep for yourself. But the run rate -- NII run rate is lost, because you basically syndicate out. So the contribution margin from the syndicated loan is evidently lower. But that goes hand-in-hand with the fact that you don't have it on your balance sheet anymore. And what it should do, given the risk weights, which will emerge after Basel IV implementation, what it should do is a more flexible, more fungible market with less off-balance sheet business. And yes, we need to be prepared for that. Now the third question, which you had, I understand this way, that the sort of the average risk cost, which we would calculate on the present level, whether this is in terms of basis points, what we see as the new normal for risk costs going forward, standard risk cost or expected loss for 2020, '21, '22. Now in fact, what we do is that for the portfolio and the portfolio growth as we see it in the next 2 years to come, we would try to reserve levels around this same level, which we did show in 2019, i.e., around EUR 50 million. Now EUR 50 million on the present portfolio basically translates into 18 basis points. That is above the levels, which we did discuss beforehand, where we said between 12 and 15 basis points is what we see. And we were, in terms of actual risk cost, mostly and always below that. But for reasons, which I did explain, precautionary reasons, reasons which relate to overall risks, macroeconomic risk, I think it is wise to move that level up to 18 to 20 basis points. And I don't have a crystal ball. We may have specific or idiosyncratic risks, which we have to take account -- which we have to take into account, but that is the level, which we have accounted for in our planning going forward. I hope that answers your question. -------------------------------------------------------------------------------- Walter Allwicher, Deutsche Pfandbriefbank AG - Head of Communications [11] -------------------------------------------------------------------------------- At this stage, we have no further questions registered. And so as a last reminder, if you want to ask a question, please. That works handy. Two more questions. Well, maybe more questions. There's 2 more people registered questions. First, Philipp Häßler from Pareto and then Johannes Thormann from HSBC. Philipp, please go ahead. -------------------------------------------------------------------------------- Philipp Häßler, Pareto Securities, Research Division - Analyst [12] -------------------------------------------------------------------------------- Yes. This is Philipp Häßler from Pareto speaking. I hope you can hear me well. Firstly, I understand you mentioned efficiency measures you will take in H2 2020. I'm not sure whether I've understood that correctly. But maybe you could elaborate on this a little bit. And secondly, on funding, you've shown this nice graph how your funding costs have developed. They have gone up during the last 2 weeks. My question is how much of your Q1 funding plan could you do before this spike -- or not the spike, before the deterioration of the market environment? -------------------------------------------------------------------------------- Andreas Arndt, Deutsche Pfandbriefbank AG - Chairman of Management Board, CEO & CFO [13] -------------------------------------------------------------------------------- Well, as we have a very foresighted treasury, we did a substantial part of funding already before the tax kink. You could see on the chart. And as we did, as my colleague, Marcus Schulte put it, we did a bit of overfunding also at the end of last year. We sit very comfortable on that side. So we are in a blackout period anyway. Because of figures, we have no need to go to market now. We can sit and wait and observe markets as we go along. So -- and we certainly have no intention to buy in at these levels at this point in time. What will come, we will see. But presently, we are comfortable on all levels. The second question, which is your first question on efficiency measures, what I said is, we will look into efficiency measures. We will take measure, what measures we can take a look into that. The background of that is when we talk about client portal, when we talk about efficiency, potential efficiencies from straight through handling of data into the back office of the bank, into credit risk management, operations and so on, we need to do that in a way that streamlines our process. So it is closely linked with and closely linked into what we do, for instance, on things like client portal. So we need to link that up. We need to define the way how we get more into standardized processes, which will fit this new client portal, and make use of the data input, which we receive from that and adjust our credit processes accordingly. Now that's something which we take into consideration second half. That is nothing which results into immediate measures in second half of 2020. But I want to have a picture of what we do in 2021 as we go along with all these digital initiatives. That's a constant process. This is a constant sort of reworking of processes as we go along. And it's no big bang, but it's, as I said, it's organic measures, which we undertake, as we did, by the way, on Focus & Invest, where we also reengineered processes in order to create more efficiencies to convert that into investments. -------------------------------------------------------------------------------- Michael Heuber, Deutsche Pfandbriefbank AG - Head of IR / Rating Agency Relations [14] -------------------------------------------------------------------------------- That brings us to Johannes Thormann. Johannes, please go ahead. -------------------------------------------------------------------------------- Johannes Thormann, HSBC, Research Division - Global Head of Exchanges and Analyst [15] -------------------------------------------------------------------------------- Two questions. First of all, on green finance, do you expect to see a funding advantage? Or are you willing to do this even if it will cost you more? And then secondly, regarding property types and new business, U.K. shopping is a difficult sector, probably hotels are post the coronavirus. Are there any other uptake times where you're more careful nowadays? And where do you expect to do your new business, in which regions and uptick carriers? -------------------------------------------------------------------------------- Andreas Arndt, Deutsche Pfandbriefbank AG - Chairman of Management Board, CEO & CFO [16] -------------------------------------------------------------------------------- Okay. I'll take the second one first. Yes, you're right. I mean, business is not going to be easier, and we have dated discussions about which property types in which regions we should follow. The relatively straightforward and easy answers to that is look at the portfolio contra -- sorry, the portfolio composition which we have as of end of the year. And that shows 2 or 3 things. Main markets remain Germany, the United States and France and see -- on a smaller scale, see Scandinavian countries and the Benelux. This is the places where we will concentrate off -- on. And I think in terms of risk profile, growth profile, stability of markets, those are probably the best places you can be in. The other thing you also can see, especially if you compare portfolio against new business in terms of see where we're trending at, U.K. and retail and hotel business is most likely not the places where we want to be. Well, U.K., you should be careful. But this is where we're, I'll say, more reluctant to pursue business, to be a bit more cautious on my wording. And I think that goes |
