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Edited Transcript of ARL.DE earnings conference call or presentation 26-Feb-20 8:00am GMT

Q4 2019 Aareal Bank AG Earnings Call

Wiesbaden Mar 9, 2020 (Thomson StreetEvents) -- Edited Transcript of Aareal Bank AG earnings conference call or presentation Wednesday, February 26, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Hermann Josef Merkens

Aareal Bank AG - Chairman of the Management Board

* Jürgen Junginger

Aareal Bank AG - MD IR

* Marc Oliver Hess

Aareal Bank AG - CFO & Member of the Management Board

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Conference Call Participants

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* Andreas Pläsier

Warburg Research GmbH - Senior Analyst

* Benjamin Goy

Deutsche Bank AG, Research Division - Research Analyst

* Britta Schmidt

Autonomous Research LLP - Non-Designated Member

* Dirk Becker;Allianz Global Investors GmbH;Analyst

* Johannes Thormann

HSBC, Research Division - Global Head of Exchanges and Analyst

* Tobias Lukesch

Kepler Cheuvreux, Research Division - Equity Research Analyst

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Presentation

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Jürgen Junginger, Aareal Bank AG - MD IR [1]

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Good morning, ladies and gentlemen. Welcome to our Analyst Conference here in Frankfurt, and also welcome to the people joining the conference call. My name is Jürgen Junginger. I'm Head of IR with Aareal Bank. And next to me is our CEO, Hermann Merkens; our CFO, Marc Hess; and our Head of Finance and Controlling, Thomas Müller. And the 2 first-named gentlemen will have a presentation, and later, we will be happy to take your questions.

Thank you. And Hermann, please.

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Hermann Josef Merkens, Aareal Bank AG - Chairman of the Management Board [2]

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Thank you, Jürgen. Everybody said to me I should talk with a strong voice. Unfortunately, I catch-ed the flu, so the right one, so to speak, no corona or something like that. So I'll try to do my very best, to be honest. But Marc Hess is with me, who will support me if I fail to pronounce something. But so far, so good, I guess.

So now more into the details of the presentation. If you see -- and if we move into the presentation, Page 4, so the highlights of 2019. I would say it was a very ambitious year, a very successful year. We've had a very, very strong performance, and Marc Hess will elaborate a little bit on risk reduction. So it was not just a pure risk reduction. It goes far beyond. And as I said, Marc Hess will elaborate much more on that.

Besides that, clearly, in 2019, we started with our Aareon Investor Day, clearly catch-ed attraction on the Aareon business, which we will develop further on. And overall, I would characterize 2019 as a year with a successful business development. Attractive payout, so we are still only slightly above 80% payout ratio with a 2-year dividend share. We do have a convincing strategy, which we announced in early January. And last but not least, which is very important in those times, confident outlook.

So if I may move on. Page 5 is a nice page because the summary is the tick box, the green, so to speak. I'm not quite sure whether it's green or something in between, but somewhat green. So we achieved all of our targets. Operating profit, new business in line. Remarkably, Basel IV capital ratio with 13.5%. And Aareon profit with EUR 37 million, which equals to an adjusted EBITDA of EUR 64 million.

So from a business segment reporting and performance, if I may go to Page 7. As shortly introduced, the most important thing in that respect is that the overall asset credit quality, through the accelerated derisking, further improved, which I'm proud to give some indicators. For example, the LTV, the overall LTV in the back book improved by 1 percentage point. And we reduced the trouble -- not trouble B but BBB. And the government bonds by 6%, down to 14%. Stable net interest income. Not to forget Düsseldorfer Hypothekenbank, we successfully concluded the integration. And last but not least, fairly strong capital ratios and funding.

And as I said, during the Q3 call, we now are starting to manage Basel III and Basel IV capital ratios. And I would say, especially the Q4 is a quite a good indicator that we are training ourselves how to deal with the different ratios and what derisking or other measurements might have as a positive effect of capital ratios. But more of that from Marc Hess in a second.

On Page 8, there might be one figure which is a little bit surprising. That is the overall commercial real estate book was EUR 26.7 billion, which simply indicates, yes, we've been very successful with derisking in Q4. And as I elaborated in our Q3 call, those derisking activities are like M&A transactions. You can't plan them very precise. If you would simply choose the numbers of new business syndications, prolongation without the derisking activities, the portfolio would have been on a EUR 27.3 billion level, so which is clearly an indicator with our overall business steering, we've been exactly in the range we've wanted to see at year-end. Yes, derisking came across and had positive impacts. And Marc, as I said, will elaborate on that.

Strong syndication activities in Q4, some EUR 900 million against previous year of EUR 500 million. Year-on-year, we have -- or in 2019, we've done EUR 1.4 billion against the EUR 1.6 billion in previous year. So again, a strong demonstration that the overall business model, which we started with our Aareal 2020 program, is still intact, and we are moving even with that respect in the right direction.

On Page 9, some highlights on Consulting/Services. Aareon Group, it was a pleasure to see how the Aareon Group performed in 2019. And you may remember the -- shortly after the Q3 call, the CalCon acquisition, which is a very, very good add-on into the overall program around predictive maintenance. So the CalCon is delivering some EUR 9 million total revenues and EUR 1 million EBT or EUR 3 million -- some EUR 3 million EBITDA. So just as an indication that, even on that end, we are moving in the right direction.

And deposit-taking business. Sorry, just a second. Marc will elaborate a little bit on that. I announced in the Q3 call that we will change the question of transfer pricing and other elements. So we'll see and clearly demonstrate, and you will have more transparency moving forward, how important the deposit business for the overall funding clearly is.

But we've not just been active in the pure banking business with plusForta. We acquired a leading broker of tenant deposit guarantees, meaning it's a guarantee, it's not a deficit, which is simply another field, and which is a completion of our overall offering to the housing industry from a bank's perspective.

And if you're talking about Aareal Next Level, in a second, in a few minutes, depending on how long Marc will go -- but hold on, Marc's speech will take time, but it's very important to understand that it's not just the banking business we are running here in the deposit business, it's much more. And we do have a lot of ideas how to develop that, besides the Aareon business further on.

So from the number perspective, on Page 10. I would think that especially the demonstration how we've been able, since 2015, to increase the overall total revenue line of the Aareon, from EUR 187 million up to EUR 252 million, clearly demonstrates that we are able to develop the Aareon business in the right direction. And even from the performance perspective, plus 6% sales revenue, plus 3% ERP business, plus 20% digital business, all those parameters are in line with our overall planning. And as indicated, the EBITDA level is, in 2019 -- the adjusted, sorry, EBITDA level is some EUR 64 million.

So all in all, we are very pleased from the Aareon development. And clearly, if you look back, once we started with our Aareal 2020 program, it's a very, very sustainable, on the one hand, in the right direction, sustainable and a nice development.

So now I -- as promised, I hand over to Marc Hess. The voice is still there. So Marc?

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Marc Oliver Hess, Aareal Bank AG - CFO & Member of the Management Board [3]

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Yes. Thank you, Hermann. Warm welcome, ladies and gentlemen, also from my side. Thank you for the opportunity to give you some further insights into the financials. As Hermann Merkens has already pointed out, 2019 was not an easy but a successful year for Aareal. We have reached all our financial goals, and in addition, improved our risk profile.

The operating profit was at EUR 248 million. So excluding the goodwill from DHB and the deduction costs from DHB in 2019 and the strategic investments from Aareon, we were exactly on previous year's level. As you can see in the chart, the net interest income remained stable despite of the adverse environment from the interest rate side and the increased competition, which weighs on margin. However, as you have just heard, we were able to even over-succeed our margin target.

The derecognition result stood at EUR 64 million. So that includes EUR 35 million from our Treasury book. You know that we were able to cover then, to a large part, the derisking costs from the optimization of our Treasury portfolio. Further details, you will be given in just a few seconds.

Loss allowances stood at EUR 90 million. That includes, of course, the EUR 50 million derisking, which we had to digest. The net commission income continued its increase. It increased by EUR 14 million, of course, very much supported by Aareon. And the fair value and hedge result also included some EUR 22 million burden from NPLs. So the total risk costs were at EUR 112 million, as said, including the EUR 50 million of derisking.

Admin expenses increased, as expected. This is due to 3 effects: one is DHB integration, that was EUR 11 million; the Aareon growth, with EUR 8 million; and then the less reversal of provisions compared to 2018. So all in all, we reached a consolidated net income of EUR 145 million, and an EPS of EUR 2.42.

If you're looking at capital, you can see that we had a strong increase in Basel III from 17.2% to 19.6%, and a nice increase in Basel IV from 13.2% to 13.5%. That was very much supported by the improved asset quality, of course, in the light of the derisking measures that we have taken. You know that the TRIM effects have already been digested. We already did include them in the 2018 figures. So nothing more to come from that side.

And maybe also to mention that with these Basel IV levels of 13.5%, we are somehow equal to the average of European banks on a Basel III basis and well above our 12.5% target. Nevertheless, we see it appropriate to be at those levels because there are further regulation and regulatory uncertainties ahead. As we have said in our strategy presentation early at January, we expect an SSM exercise somehow similar to TRIM for the economic ICAAP, and have already seen some tightening regarding the holding period and the recognition of AT1 capital as ICAAP capital. So as we said, this may become a new constraint for European banks.

Looking at the balance sheet on the next slide. You can see that we have optimized it and reduced it by EUR 1.6 billion. That means that we have sized back the Treasury portfolio to the level pre the DHB acquisition. It had inflated by EUR 1.6 billion with the DHB acquisition in the -- at the end of 2018.

The loan book was reduced temporarily in Q4, Hermann Merkens just alluded on that, due to a strong syndication performance of EUR 900 million and the successful derisking. We increased the money market temporarily to cover that.

By modeling our deposits, we have improved their usability for the long-term funding, and thus, reduced also the more expensive unsecured funding, as you can see here on this chart.

The importance of our deposits, on the next chart, can be seen quite nicely. They account for 1/3 of our funding mix, and they have been steadily increasing. And at the same time, as I just said, we were able to decrease our unsecured funding needs. So it's not only saving costs on that side; on top, the funding mix is more diversified, and thus, more stable in more troubled markets.

Let me turn to asset quality. In 2019, we put a strong focus on its optimization. That is true for the loan book and for the Treasury exposures. As you can see in the overview of our loan book on Page 17, we are following our strategy. So we increased our North American share by 2 percentage points to 30%, moving closer to our strategic target of roughly 1/3 of the portfolio. We decreased, also in line with our strategy, our Eastern European portfolio, especially in Russia and in Turkey. And as we entered Australia in 2018, we also continued new business there, and therefore, the share of Asia Pacific increased slightly.

At the bottom right corner, you can see the portfolio ranges. Here, again, the derisking showed its effect. We are now below 1%, with LTV ranges of above 80%. And we have, on the other hand, increased the LTVs to 9 -- below 60% to 96% share of the portfolio.

The overall LTV, and this can be seen on the next slide, increased again. So I think it's the third time in a row, from 58% to 57%. And we also, if you compare to last year's chart, decreased the variances of the LTVs. That means that we have seen a movement towards the average here in all countries.

Looking at the countries. We increased our exposures in France, we talked about that in Q3, and in Canada. And we significantly decreased our loan book in Italy, supporting -- supported by our derisking initiative. Further details can be seen on the next slide.

Here, you see the Italian exposure. The exposure itself was reduced by 30% or EUR 1.3 billion, from EUR 4 billion to EUR 2.7 billion. This reduction of EUR 1.3 billion results in EUR 1.1 billion from the accelerated derisking. Here, we decreased the Italian government portfolio by 40% or EUR 400 million. We decreased a single side risk with high LTVs by EUR 350 million, and the NPLs also by EUR 350 million.

The NPLs in total decreased from its peak in mid-2019 by 40% or EUR 800 million. That includes a reduction of EUR 450 million in Italy.

The Italian portfolio can be seen on the next slide. And here, you can see that the derisking showed effects in basically every aspect. The loan volume decreased by 30% to EUR 1.9 billion. NPLs, I just mentioned that, by 40% to EUR 650 million. And the structure of the portfolio -- of the performing portfolio also improved significantly.

Just to remind you, still last year, we had a 17% share for residential, with an LTV of more than 90% in that portfolio. We have decreased that portfolio basically to 0. So it's now below 30%, and that led to an overall reduction of the average LTV, from 68% last year to 57% this year. At the same time, the yield on debt increased. So all in all, we have seen a significant reduction and a qualitative improvement of the Italian portfolio.

The defaulted exposure can be seen and detailed on the next slide. I just mentioned the overall NPL decreased since its peak by 40%, despite of the 4 shopping centers in the U.K. that had been on watch and defaulted in the course of the year. However, if you're comparing Q3 to Q4, U.K. defaults, you may see that this has eked -- that this has decreased again because we were already successful in restructuring one of those shopping centers. The NPL ratio itself is at 42% now under IFRS, and this is the first time, at least, as long as this chart is dated, that it has come below 5%.

Regarding the Treasury portfolio on the next slide. As said, also some significant movements in here. We have improved the risk profile of the Treasury book, too. We reduced the size by EUR 1.4 billion, now it's the nominal figure here, to pre-DHB level. This was supported by the derisking EUR 400 million less Italian government bonds. And as a consequence, the share of -- BBB -- also troubled -- BBB or lower-rated bonds decreased from 20% to 14%. By that, we achieved a significant relief also for the ICAAP usage.

So let me summarize. The derisking supported substantially our improvements in the asset quality. The NPLs reduced by 40%, the Italian exposure by 30%. And the structure in the Italian portfolio was improved. We improved the LTV, both on the total portfolio and in Italy, here significantly.

We improved the capital ratios that was supported by the derisking, too. And the ICAAP usage was quite significantly reduced from 63% to 53%. And on top, we optimized the Treasury portfolio, which led to a gain of EUR 35 million in the derecognition result, and thus, compensated for a large part of the derisking costs.

Let me now come to the outlook for 2020. As you can see on Slide 24, with the indicators on that chart that there is no reason to believe that 2020 will become a better environment for banks than 2019. The uncertainties regarding GDP have even increased with corona, and therefore, the downward pressure on rates remains or even increased.

As indicated, we may see further tightening from the regulatory side, especially on the ICAAP potential here.

Nevertheless, we have some tailwinds, too. And this should remain for Aareon as the European housing industry should continue catching up to the U.S. regarding the efficiency and digitization developments.

So despite of that challenging environment, and I'm now on Page 25, we expect a stable business development in 2020. The details for the P&L lines can be seen above. We expect a combined NII and fee income stable, maybe a slight growth, of course, with an increasing share of Aareon. The loan loss provisions should be down slightly, below -- or according to, let's say, the average risk costs, which are slightly below 30 basis points on the average portfolio.

On the admin expenses side, we see a slight increase that comes from the Aareon growth, including the first-time consolidation of CalCon, and this will overcompensate the reduction that we will see in the bank as a follow-up of our OpEx program.

The operating profit should remain on previous year's level. However, please note that in the lines, risk provisions and operating profit, no effects from a potential selective continuation of the accelerated derisking initiatives are included.

On the other hand, we expect positive effects in our net income attributable to shareholders from the possibility to activate tax loss carryforwards. This will put us in the position to realize potential further derisking opportunities without diluting our net income. On that basis, we are forecasting a stable net profit on 2019's level.

On top, we have reflected Aareal Next Level in the structure of our outlook, as you can see here. To increase transparency, we have added KPIs for our 3 business lines, and plan to adjust the segment reporting from 2020 on accordingly. That means we will report 3 segments in 2020 going forward. And as you can see, we are planning a stable portfolio and stable new business in commercial real estate and a stable deposit base.

At the same time, our fee-generating operations within Aareon, at the forefront, continue to expand.

How our strategy program, Aareal Next Level, is designed to support that will be presented to you now by Hermann. And therefore, I'm happy to hand back to you.

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Hermann Josef Merkens, Aareal Bank AG - Chairman of the Management Board [4]

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Yes. Thank you very much, Marc. And as I indicated, we've been through the program early January. But I will give you a short recap on what we presented. It's on Page 27 already. And clearly, some indications how we will measure the progress in the various aspects of the program, the 27 short recap.

If I may start with Structured Property Financing. And as I indicated, clearly, we've been very active in, so to speak, look for new opportunities how we could make use of our success on structuring large-ticket deals in Europe. So we've been very successful on syndication. So the next level here will be that we are looking into how we could establish a kind of balance sheet line -- business line. So meaning that we team up with third parties or look into other opportunities in that direction, simply not just to end up with our overall balance sheet, which we aim to keep fairly stable, but to support business for our clients even beyond that.

On -- in January, I explained that we're looking into other asset classes as well. Clearly, I'm not talking about consumer finance or something like that. But there are other asset classes, which are clearly, so to speak, from a pure structure point, a little bit adjacent to our commercial real estate financing. On the other hand, maybe that they do have another a structural economic pattern. So we will look into that as well.

And last but not least, the promise with respect to cost base, is still valid. Not mentioned here in detail, but still valid. So we will end up and aim to end up with a bank cost base at the end of the planning period of EUR 230 million. So remarkably down again by 10% compared to today's levels.

On Consulting/Services, I elaborated in January a little bit about the different work streams with respect to unbundling. So all projects have been started. Just as a reminder, unbundling not just mean the technical infrastructure or contracts we do have with the Aareon. Clearly, that is somewhat stating the obvious. And you see in our consolidation that there are net numbers, to be honest, so you can't read the full number out of that. But you see that we do have business relationships with Aareon, from the bank to the Aareon.

And unbundling means as well that we have to look into capital. And as you know, the business -- the Aareon business is a capital-light business from a bank's perspective, meaning that we do have to underlie the business just with RWA, not with hard capital. And clearly, we are looking into that as well. So all that areas, we are catching up with, and clearly, keep you informed how we develop there.

And regulatory treatment, as mentioned in January, in favor of -- first time since a while, in favor for the bank, with respect to the treatment of the Aareon as industrial holding, which simply allows us to lever the business with third-party debt, which is clearly helpful.

On Consulting/Services itself, as indicated, it's not just the deposit business we are running here. We developed throughout the Aareal 2020 program the best platforms. And clearly, we're looking into other products we could offer to the housing industry over time. And by doing so, we will increase the fee income level from that business throughout the planning period.

And last but not least, the Aareon business. And maybe that we could switch here into the Page 28, which simply indicates a little bit more how we look into that business, and what is the potential if you're talking about M&A activities. So you may remember this small dark and light blue box, which is simply indicating where is the Aareon now. With a EUR 19 per unit ERP usage, with a EUR 24 per unit digital usage, including ERP, and with the potential, if I would roll out all the products Aareon has in place to all the customers, which is clearly an effort, but just as an indication, of EUR 35 to EUR 40 per unit.

So -- and if you look a little bit below, we tried to indicate about what market size we are talking if you're looking into further M&A activities. So that's a kind of share-of-wallet indication, clearly, it's somewhat hands-on done with the Aareon development department. But on the other hand, clearly indicates that there is a lot of potential we could touch on if we now start, so to speak, the M&A roll-up model.

On the left, a little bit different view on the levers we already presented. So what are we talking about from an industry, meaning the IT perspective, if you're looking into the Aareon business overall? And what are the levers we are looking into? And what drives the specific -- what is the specific lever really driving?

Clearly, if we would increase our European position, meaning buying another ERP company, and I don't know where, but as an example, that could clearly put additional revenues into the RPUs, into the unit and, clearly, are in the recurring revenue as well.

And another thing, which is very important to understand, that is the last one, just as an example, develop software-as-a-service business and manage cloud strategy beyond Germany. Why we are stating here beyond Germany? We already do have a fairly high share of recurring income. That clearly leads -- or is driven by the fact that we already have a cloud business in -- an Aareon cloud business in Germany. So 90% of our customers are using the Aareon data center as Aareon cloud.

So -- but in other countries, we clearly now start to switch the license business into a software-as-a-service business, which will cost, at the beginning, some money. But at the very end, we will increase our share of recurring income. And you could go through all the levers, which clearly are indicating that we are looking into the Aareon as an IT company, and clearly have identified how we could move on and improve the overall business of the Aareon, be it with M&A activities, be it with self-developed programs.

Last but not least, overall -- at Page 29, the overall KPI sets. We try to keep it as simple as possible, but on the other hand, to put in as much information as possible at the same time. So it's a difficult, so to speak, thing to handle. But at the very end, I think it's easy to read. From a group revenue perspective, we would think that we will end up with low single-digit growth. But as you may imagine, the Aareon business will increase significantly year-on-year.

The adjusted EBITDA from Aareon, EUR 65 million -- sorry, EUR 64 million, as of 2019, should increase over the planning period and should end up in above EUR 110 million level. And the difference between the EUR 64 million and the EUR 40 million, we have already mentioned in other charts, is simply IFRS 16 effect, some EUR 10 million as a easy number. Rest of it is simply interest and depreciation.

But as EBITDA is the number IT companies are looking into, we actually will comment on that number moving forward. And there are not that many adjustments, so to speak, in 2019 so far. So we invested just EUR 3 million, but the adjustment for those investments should increase over time.

Capitalization. Clearly, we are sticking to our 12.5% Basel IV target ratio. Pretax ROE, 8.7%, 2019 should be stable through the investment phase. Clearly, on a bank level, you have deduct everything. On an IT company level, to a certain extent, everybody is ignoring depreciation, et cetera, et cetera. So that's why we've put in here some explanation and transformation.

And clearly, we are still aiming for the 12%. And on the next page, I will elaborate a little bit what are the ingredients -- that's nothing to do with the food, it's simply a difficult word -- ingredients, something like that. And dividend policy is still intact, as you see here.

So what's up with the 12%? And if I may go back to 2018, where we said, "Okay, maybe the 12% are somewhat reachable." At that point in time, we clearly looked into a different interest rate environment. With respect to prognosis, that changed. And I already and constantly promised, since we started the Aareal 2020 program, that we will have and will develop optionalities if environment changed. And that is exactly what we are doing with the Aareal Next Level.

Nevertheless, the 12% are clearly a composite out of the bank business and the Aareon business. And clearly, external environment, some support at some point in time will be very much appreciated. But I would say that nothing -- we are alone in the European banking industry. I think there are some other banks hoping for more than we do.

So what I'm simply trying to say, for that environment, we've been very successful throughout the last couple of years. We've wrapped up opportunities, developed the group, opened up optionalities, and that's the way how we will continue.

So on Page 31, short summary about Aareal Next Level, but I think I've presented the summary during my speech. So now we are open for your questions, remarks and so on.

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Questions and Answers

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Jürgen Junginger, Aareal Bank AG - MD IR [1]

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So we will start here of taking the questions. And even we have people already queuing on the telephone call, but I think we should start here. So Benny, please.

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Benjamin Goy, Deutsche Bank AG, Research Division - Research Analyst [2]

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Benjamin Goy, Deutsche Bank. Three questions, if I may. First, on regulation. One common theme so far in European banks' reporting season has been that the overall impression was for many European banks that regulatory headwinds have stopped or might somewhat even speak about regulatory forbearance. Now you mentioned various other constraints like ICAAP. Do you think you're just very conservative? Or others have been ignorant of the upcoming risks? Or are there some ideas on credit issues we should be aware of with regard to your bank or your business model?

And then on Aareon, one, just to clarify. The EUR 9 million revenues you flagged for CalCon, is that -- should we -- for an underlying run rate in terms of Aareon revenue growth, should we deduct it? So meaning, it's, at the lower end, 4% only? Or comes to CalCon on top?

And then more strategically, on Aareon, you mentioned industrial holding and also the EUR 3 million investments. So just when you look at the business from an organic, but also inorganic growth perspective, can this be organically even faster growth, more investments? Or do you need to balance also the P&L?

And then with industrial holding, any inorganic opportunities? How big could that be, just to -- is it a bit more like the add-ons you did in the past with Aareon? Or could there also be more transformational deal for the business?

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Hermann Josef Merkens, Aareal Bank AG - Chairman of the Management Board [3]

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Yes. Thank you. May -- some comments on regulatory headwind. Clearly, we've noticed that some banks are, how should I frame that, putting some interpretations of guidelines in the very front of their presentations. And with respect to AT1, for example, they are dealing with the nominal regulatory regime, where one might be allowed to replace some elements of the P2R, if I have said correctly, with AT1 or Tier 2, which, at the very end, could be helpful.

On the other hand, as Marc indicated, we do expect that the ECB will look into the ICAAP model very intensively. And here, we are talking not about the nominal. We are talking about the economic ICAAP model. And that's simply a gut feeling because if you look into the -- all the regulatory frameworks and papers, you will find not that much about that, which, at the very end, would lead to the fact that the regulator has here some room to look into.

And with respect to business model, clearly, as we're running, so to speak, a commercial real estate book, and from a funding perspective, we have done -- we are doing capital market funding deposits and so on, that always leads to a certain balance sheet structure. I will not -- I wouldn't say that we are somewhat, in that respect, specific. Maybe other banks do have other items in their ICAAP model. But clearly, that is -- has to be reflected in the overall volatility of the ICAAP model as well.

But as Marc mentioned, we've done a lot of homework in 2019 from our end.

We improved ICAAP usage dramatically throughout 2019 with the derisking measurements we've taken. So this all-in-all package of derisking helped us to end up with, what was it, 57% or something?

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Marc Oliver Hess, Aareal Bank AG - CFO & Member of the Management Board [4]

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53%.

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Hermann Josef Merkens, Aareal Bank AG - Chairman of the Management Board [5]

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53% ICAAP model usage, which is, in my view, a fairly good number. So we are -- sorry?

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Marc Oliver Hess, Aareal Bank AG - CFO & Member of the Management Board [6]

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Including the AT1.

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Hermann Josef Merkens, Aareal Bank AG - Chairman of the Management Board [7]

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Including the AT1. In that respect, we are very prepared.

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Marc Oliver Hess, Aareal Bank AG - CFO & Member of the Management Board [8]

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Yes, maybe with regards to the AT1 usage in ICAAP. This is also something that we hinted. You may have a look on Page 61. Here, we had -- and this was hardly realized by the market. We saw -- we didn't see that. There was a Q&A published by the ECB already in spring last year, saying that new AT1 will not be eligible for -- or as ICAAP capital, and it is at least doubtful whether existing AT1 will get a grandfathering.

So the pressure on ICAAP comes from 2 sides: one is sort of TRIM exercise that has been announced by the ECB as in SSM focus for the next years; and the other one is from the capital side, where AT1, at least prospectively, cannot be taken as ICAAP capital anymore. And this is why we say this could be one of the new constraints for European banks.

Then on CalCon, you asked whether this comes on top. Yes, it does. Please remember that in May last year at the Investor Day, we excluded M&A. So M&A clearly comes on top to the already promised figures.

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Hermann Josef Merkens, Aareal Bank AG - Chairman of the Management Board [9]

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But the 6%, it's easy because we've done the transaction in December, so no real impact, so to speak, in 2019. And if we would look into the CAGR in 2020, clearly, that would have a reflection in the comparison. So with respect to industry holding and M&A activities, clearly, we see the opportunity to do M&A activities fairly or clearly. And the aim here is to simply catch up the speed of the overall performance and transition of the Aareon into a real European software house for the real estate services.

The reason why we've looked that intensively into that is fairly simple. There are a lot of roll-up models -- so M&A roll-up models around, and there's a lot of opportunity around one could look into, but it has to fit. And the CalCon, for example, is the best, so to speak, indicator how we're looking into that. CalCon as a company -- and I think I elaborated a little bit during our general presentation, is a company who is looking into at what point in time, the facade has to be done or the windows have to be renewed and so on from a pure mathematical approach or KI approach or AI approach, however you will name it.

And on the other hand, the Aareon is developing a predictive maintenance program, which is much more looking into the elevators, boilers and so on. So -- and clearly, if you would combine both ends, you would have, from the outside into the different usages inside, a combined product, which you clearly could offer very good into the housing industry and other industries because CalCon is not just active in housing industry, they are doing some business with corporate and so on as well.

So -- and if you're talking about M&A in general, clearly, a transformational -- it's always a question how large a transformational M&A activity would be and how big that M&A, at the very end, would change the overall -- or how big that M&A transaction would be and how the Aareon business model would change into other areas. But as I elaborated a little bit on, there's a lot on, for example, facility management one could look into, which is a kind of adjacent product to the housing industry from a pure -- "ERP business" has nothing to do with the housing industry, but the add-ons like CalCon and the predictive maintenance program, you could use at that end as well or maybe the company has other products you could use for the housing industry.

So it could be sizable, the M&A activities, clearly. And I would not exclude that from a pure size perspective. They could be larger compared to the activities we've done in the past.

Nevertheless, why we've been successful in the past? We acquired simply companies, which have been relatively small. And in that respect, tried to move into the digitization and simply do not have the spending power to do a lot in that area. So that has been a very successful pattern in the past. But if you really want to speed up with the M&A, so up to 5 or something per year, then I wouldn't exclude that we're not ending up in the size we've seen in the past.

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Jürgen Junginger, Aareal Bank AG - MD IR [10]

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(Operator Instructions) And now Dirk, please.

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Dirk Becker;Allianz Global Investors GmbH;Analyst, [11]

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It's Dirk Becker from Allianz Global Investors. Firstly, on your guidance for the loan loss provisions for 2020, you're guiding again for EUR 90 million. I understand that last year result included EUR 50 million from your risk reduction, which is hopefully not coming again in that size. And the NPL portfolio is much smaller now. So why would we still have to expect the same loan loss provisions?

And then secondly, you announced a change in your transfer pricing for the deposits. I just wanted to understand, this is purely cosmetic, right? So on the bottom line, nothing will change? And you probably, at the moment, benchmark it against market rates. So what will be the -- how can I say, the results of this for us to better understand what is really changing?

And then thirdly, maybe you can explain a bit better what -- how the derisking that you made in Italy worked? Did you sell NPLs? Or did you find agreements with the borrowers? Or how did it work so quickly and so efficiently?

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Marc Oliver Hess, Aareal Bank AG - CFO & Member of the Management Board [12]

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Yes. Thank you, Dirk, for your questions. I would like to take the first 2, and Hermann is taking the last one. Regarding LLPs, maybe there's a misunderstanding. If you are looking again on Page 25, we are not guiding for another EUR 90 million. Here, we say it should be down slightly. Calculated and estimated in our plan according to our average risk costs, which are below 30 basis points, so roughly 27, 28 basis points on the average portfolio. So if you multiply that, then you're coming to around 75.

And as I also mentioned on my initial chart showing the P&L, we didn't have only EUR 90 million risk provisions in 2019, we had EUR 112 million because EUR 22 million appeared in the fair value P&L line. So it's always, let's say, depending on where a loan is classified. So we had EUR 112 million, including the EUR 50 million derisking budget. Part of that derisking budget was also attributable to the other line.

And as you just said, you said, "Hopefully, you will not go for the same budget of EUR 50 million in 2019." No, we won't. Yes, we haven't finally defined it yet because it's always depending on the opportunities to accelerate, and we are only talking about an acceleration of existing measures. So to accelerate derisking in the individual exposures. So it's difficult to plan. But as we have been very successful in 2019 and realized a large part of the potential, we believe that if we do further derisking, the budget should be significantly smaller than in 2019.

Regarding transfer pricing. We have prepared a chart here on Page 57.

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Dirk Becker;Allianz Global Investors GmbH;Analyst, [13]

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By the way, your self-explaining chart. So Marc tried to explain that 3 times to me.

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Hermann Josef Merkens, Aareal Bank AG - Chairman of the Management Board [14]

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Should I stop here then?

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Marc Oliver Hess, Aareal Bank AG - CFO & Member of the Management Board [15]

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Good. So I try again. I'll try to explain it again. What we have shown here is the result as we expect it for the new segment that includes our IFS -- or our Consulting business going forward. In 2019, we had an EBT of minus EUR 65 million, and we expect roughly minus EUR 20 million for that new segment in 2020.

To start with the easiest part, that's the fee growth. As you have seen in the outlook, we guided a fee growth of 15%. So that's roughly EUR 3 million. That means the adjustment of the modeling and the transfer pricing, and this was your question, accounts for roughly EUR 40 million.

As we have explained already in Q3, we have adjusted the models of our deposits. Liquidity-wise and regarding the interest rate change risk, this is a bottom line effect. So this really increases the bank's bottom line and is, of course, also attributable to the segment. This is not just left pocket, right pocket. This is just below EUR 15 million, yes?

So the remainder, a little less than EUR 30 million, comes from the new transfer pricing. So far, we have rewarded those deposits according to the secured spreads. As their nature, however, is unsecured, and I explained that when we are looking -- when we were looking at funding, they are replacing the unsecured funding, we are now allocating unsecured spreads to them according to the mix of our unsecured funding, which is 80% with private placements and 20%. So the remainder that we cannot allocate via private placement through capital market benchmark funds. And this is what we allocate here, yes? And this is changing the transfer pricing. So far to the left side of that chart.

On top, we can say that if we didn't have any deposits, then we would have been or we would be in the position to fund everything unsecured at the market with benchmark prices, and this can roughly be estimated for the EUR 8 billion that are currently priced with private placement spreads with EUR 20 million more, yes? So you can see it's already breaking even if you account for that.

Then of course, we are covering group allocation, so allocated cost in that segment. And if you take this all up, you can see that economically, this segment, already in 2020 would be -- or would show a positive contribution.

I know it is quite complicated, but I hope I came across at least to some extent.

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Hermann Josef Merkens, Aareal Bank AG - Chairman of the Management Board [16]

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Italy. Derisking. Yes. There was a question about derisking. And most of the derisking activities have been loan sales, which we've conducted first time in Italy. We've always a little bit in between whether we should do portfolio deals or not or single-loan deals or not. So at the very end, I think, with a single-loan deal selection, we've been, as Marc presented, very successful. And that's the way we look forward.

So there are parties around. Clearly, 1/2 to have the power to negotiate relatively good pricing for various reasons, and then you may end up with the economically meaningful discount to a provisioning level you have in the books. And clearly, for those opportunities will arise, we will catch them up in 2020 as well.

So just one single comment, not as an indication. But as I have tried to and Marc have done that during his presentation as well, the derisking that was not just the P&L effect, which you clearly see, or the EUR 50 million, that was an improvement on LTVs. That was an improvement in ICAAP model. It was an improvement in Basel IV ratios. So it's an all-in-all kind of thing.

And I'm not saying if somebody would be around with a decent number for the Italian portfolio, we wouldn't shy away even if you go above the EUR 25 million because I think the overall effect is very, very good. So -- and that's an important notice I think. If you're talking about derisking, it's not just that we are doing something with NPLs or even with performing loans, simply that we -- if you have the opportunity to really derisk the portfolio, leveling LTVs out and so on, then we will do that. Some limitation from Marc, but...

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Jürgen Junginger, Aareal Bank AG - MD IR [17]

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Andreas?

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Andreas Pläsier, Warburg Research GmbH - Senior Analyst [18]

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Andreas Pläsier from Warburg Research. One question, your development at Aareon, the EBITDA development. You expect growth, the doubling of EBITDA in 5 years from 2018 from a level of EUR 50 million. And now you have an adjusted figure in 2019 of EUR 64 million. And you have here in your presentation, a number...

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Jürgen Junginger, Aareal Bank AG - MD IR [19]

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Andreas, can you please turn on your mic?

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Andreas Pläsier, Warburg Research GmbH - Senior Analyst [20]

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It's on. It's on. Yes, okay. Oh, wait. No, better. Sorry. Sorry for that. Yes, so EBITDA development. And you mentioned in your presentation that you want to achieve here above EUR 110 million EBITDA. How do -- I should take this in my numbers because your target was a doubling to EUR 100 million, and this EUR 110 million, now you are more positive, or this also includes the M&A activities in 2019?

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Hermann Josef Merkens, Aareal Bank AG - Chairman of the Management Board [21]

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No, it does not include but the difference is the IFRS 16 effect, which, if I have that correctly, we -- it was not in, in our investors seminar presentation because we've been a little bit unsure how the IT company world would look into that. Everybody is putting that into an adjusted EBITDA number. And that lifted at the very end, the EBITDA to the EUR 64 million, some EUR 10 million, if I have that correctly, which lead to the higher number. You are absolutely correct. Then the end number should be higher as well. But allow us a little bit of, I would say, free room in a 5-year down-the-road period. But the IFRS 16 effect should be fairly stable. So it's not expected that the EUR 10 million will move up. It's simply a EUR 10 million throughout the years line. So that's a major difference.

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Jürgen Junginger, Aareal Bank AG - MD IR [22]

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And I think we will go to the call and should start with Britta, if I'm correctly.

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Britta Schmidt, Autonomous Research LLP - Non-Designated Member [23]

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Hello, can you hear me? Hello?

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Jürgen Junginger, Aareal Bank AG - MD IR [24]

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Okay. Sorry. I hadn't seen you, Tobias.

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Tobias Lukesch, Kepler Cheuvreux, Research Division - Equity Research Analyst [25]

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Tobias Lukesch from Kepler Cheuvreux. Three questions from my side as well, please. So firstly, touching on revenues again. Last time, you indicated a headwind from NII EUR 20 million to EUR 30 million. I just wanted to double check how you see these developments now for 2020?

Also with regards to Treasury activities that were quite imminent in 2019, how sustainable do you think these revenues in 2019 are going forward?

And secondly, again, touching on the capital. Yes, there was a much lower loan portfolio than expected by year-end, only EUR 26.7 billion. If we assume you go for EUR 27 billion or even EUR 27.5 billion again, so you're around 13% core AT1 ratio or between the 12.5%, which is still your target over the next years, to 13%. Do you think, with regards also to the increased dividend, what kind of message do you think -- is there a kind of message you want to send to the capital market with regards to potential higher capital returns? You just pointed to the downside basically on the ICAAP, but I was just wondering, what we could expect from that side, more looking on the core AT1 ratio development, which looks quite sound, actually.

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Hermann Josef Merkens, Aareal Bank AG - Chairman of the Management Board [26]

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Yes, Tobias. Thank you for your question. It's right or it's correct. You said we -- you quoted us that the pressure that we see from the lower rate environment 2020 to 2019 is roughly EUR 20 million in NII. That is still our estimation.

However, we also said that we prepared some countermeasures. And the most obvious one is the modeling of our deposits. I just hinted that this will lead to a supportive NII of roughly EUR 15 million. So this is basically balancing it. We have several other measures regarding our funding structure, for example. So we are still confident that this can be handled well in 2020.

However, regarding our outlook, as I said, we estimate that NII plus fee income will remain stable, maybe a little bit increasing. That also indicates that we are now planning with a somehow decreasing NII compared to 2019.

The reason is threefold. One is the higher syndication results, which I think was a great achievement in Q4. So therefore, the performing portfolio had a longer -- had a lower base than originally expected.

The second most obvious is the derisking, yes? The derisking itself, of course, also brought the starting point for our performing credit loans to a lower point than we originally estimated. Nevertheless, we will be back to the levels that we had throughout the year, so just around EUR 27 billion and above at the end of 2020.

Last but not least, as we have decreased our nonperforming loan business -- nonperforming loan portfolio significantly, also the contribution from unwinding will decrease. So this is also weighting somehow on our portfolio. And this will be then balanced again or digested once we are back to the original levels.

This also led somehow to your second question. If I interpreted correctly, you said that the capital ratios were also supported by the lower portfolio level itself. So what does it mean if it goes back to EUR 27 million, EUR 27.5 million? Well, taking an average risk weight of 25% under Basel III and 50% under Basel IV, then you can easily see that this is roughly 2 -- 20 to 30 basis points under Basel III and 30 to 40 basis points under Basel IV, where still, we would be much above our internal target of 12.5%.

And therefore, you said talking about ICAAP, is there a message included regarding capitalization? Well, the message is much more that we say this was one of the reasons why we adjusted our Treasury portfolio. We did that early. So in anticipation of further tightening in ICAAP. We have already seen some tightening throughout 2019. For example, the holding period for bonds were extended to 260 days. That means the more volatile bonds, for example, Italian government bonds, had a higher consumption in ICAAP. This is why we reduced that and this is why we reduced the BBB rated bonds and those below. So there is a sort of anticipation already included, and this is why we're into it. Nevertheless, as also said, we believe that this is the -- one of the key themes going forward for ECB, so there is probably more to come on that side.

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Tobias Lukesch, Kepler Cheuvreux, Research Division - Equity Research Analyst [27]

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And the capital return, potential dividends, the increase of the dividend to EUR 2, is there any message behind that?

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Hermann Josef Merkens, Aareal Bank AG - Chairman of the Management Board [28]

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No message, but an observation. So we've clearly seen in the European banking, you'll see some banks which allowed to do share buybacks. I would say they may be through everything with respect to models and so on. For the EBA models, which I do not have completed, so we do have a sequence that we had the TRIM results, and we do have to go through the EBA modeling. I would say, before we are through the EBA modeling, it's fairly hard really to look into what is the right capitalization level. Level means what is the RWA outcome out of the newly modeled, so to speak. And that's somewhat seem -- unfortunately, we seem a long while with the regulator. And I try to characterize that always as questions you should raise and questions you shouldn't raise because then you have to live with answers you may not like.

All what I'm saying is my real best guess. But on the other hand, hope is, if we are through the EBA modeling, then one would clearly have the cleaning and clear up how the regulator looks into the model world for Aareal, but for other banks, which do use models as well, and then you really have kind of idea how to steer in one or the other direction, maybe in this -- you may have -- you may need additional capital or you may have the pleasure to have capital returns. But again, here, my political statement is still there and around. I would be surprised if models would lead to a higher capital impact compared to Basel IV.

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Jürgen Junginger, Aareal Bank AG - MD IR [29]

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Okay. Sorry, Britta, for keep you waiting.

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Britta Schmidt, Autonomous Research LLP - Non-Designated Member [30]

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Can you hear me now?

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Jürgen Junginger, Aareal Bank AG - MD IR [31]

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Yes, we hear you now. Sorry.

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Britta Schmidt, Autonomous Research LLP - Non-Designated Member [32]

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Okay, excellent. I've got a few questions, please. One would be coming back to the ICAAP. I guess you're suggesting that this could be an increase in requirements. Do you know whether this will be Pillar 2R and Pillar 2G? And is there any way of being able to quantify this at this stage?

Secondly, also on the ECB guidance on NPLs? Do you expect this to be Pillar 2R or Pillar 2G? I don't know whether we've got any clarity on that.

And then maybe you can help me a little bit piece together the 2020 guidance. With NII and fee income being similar to this year's level, adding a more normalized fee recognition income and assuming no further derisking and costs of around EUR 490 million, loan loss provisions around EUR 80 million, I'm still falling a little bit short on the operating profit being flat this year. What other elements am I missing?

And then lastly, you said the potential derisking impact could be less than EUR 50 million. Should we, therefore, also assume that the DTA capitalization will be in the same sort of region?

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Marc Oliver Hess, Aareal Bank AG - CFO & Member of the Management Board [33]

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So taking your questions regarding the ICAAP. Here again, I would like to point to the chart, which I'm currently not finding. Which was the number? What is something -- do you have 61? 61. Well, we tried to make it as transparent as we can currently identified it. As you can see here, the ICAAP consists of 2 pillars. So one is the economic ICAAP; and one is the regulatory capital ratios. And you said -- or you asked if we see here an increase in the P2R or the P2G requirements. No. We think that they will take it separately.

And interestingly enough, as other banks have already pointed out with regards to the P2R, there's even a relaxation, as you certainly know in the market, given that the ECB, Mr. Enria, recently stated that AT1 and Tier 2 can be used, to a certain extent, to fill up the P2R requirement.

At the same time, and therefore, even more surprisingly, they said that AT1, on the other hand, within the economic model, shall not be used going forward anymore, yes? So this is the point that we want to make, and therefore, we said constraints could arise in the second pillar from two sides. One is from the modeling itself. Increased holding periods, for example and also a more equalization amongst the usage of European banks of those models. And on the other hand, we will see capital that is attributable to ICAAP to decrease with the AT1 fading out here.

Regarding...

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Britta Schmidt, Autonomous Research LLP - Non-Designated Member [34]

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Just to clarify on that. And so what you're saying is, this is not the part of the ICAAP where the ICAAP result informs the Pillar 2 requirements. This is the separate calculation where you are required to hold a certain amount of economic capital. And given the derecognition of AT1, that CET1 element could potentially increase in that calculation?

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Hermann Josef Merkens, Aareal Bank AG - Chairman of the Management Board [35]

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Right.

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Marc Oliver Hess, Aareal Bank AG - CFO & Member of the Management Board [36]

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That's correct, yes.

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Hermann Josef Merkens, Aareal Bank AG - Chairman of the Management Board [37]

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Yes.

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Britta Schmidt, Autonomous Research LLP - Non-Designated Member [38]

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Okay. And -- but there's no way of really estimating from the outside how much that would be?

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Hermann Josef Merkens, Aareal Bank AG - Chairman of the Management Board [39]

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As indicated, so there's no specific in-detail guideline out there, how -- and it's a pure modeled, so to speak, view on the economic capital, which may vary from bank to bank. So there are some guidelines -- but no. And there is a different treatment between, for example, Southern European banks and the Northern European banks. Northern European banks are using various risk models, whereas in some Southern European countries, you will find expert models in the ICAAP model.

And in addition to that, some banks didn't have any ICAAP model in the past anyhow. So we are somewhat trained with the ICAAP model. But it's a real separate bucket where you will find barely something from the outside. It's a very bank-specific type of thing. And as Marc indicated, if you simply look into Italian bond portfolio holdings, they are treated in this economic ICAAP model, I would say, to do a 2 holding periods of 265 days with a very high confidence level, badly, I would say. And clearly, the overall idea is it should be an economic capital model.

And economically, even with Italian government bonds, normally, you don't have -- or you shouldn't wait 265 days. So the execution period for an Italian government bond, maybe 30, maybe 60 days, but not 265. So -- and so there's a different treatment in Europe so far. The aim of the ECB is to harmonize that. And that's the main reason why we think that we will see some reflections out of that in the European banking industry going forward.

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Marc Oliver Hess, Aareal Bank AG - CFO & Member of the Management Board [40]

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Okay. Regarding to your question with regards to the outlook. You said if you're adding up those lines, which we are currently forecasting, you're not coming to an unstable operating profit. So just 2 hints: one is the fair value P&L line, where I thought -- where I said this was also diluted in 2019 by NPLs; and the other one is the other income that was below the multiyear average in 2019. So maybe if you take those 2 lines into consideration, then you're coming to the guided number.

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Jürgen Junginger, Aareal Bank AG - MD IR [41]

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Next here on the telephones, Johannes?

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Johannes Thormann, HSBC, Research Division - Global Head of Exchanges and Analyst [42]

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Johannes Thormann, HSBC. Just 2 questions left. First of all, looking at your new business volumes. We saw very little renewals, especially in Q4, but also relatively compared to the previous years, also in the full year 2019. Is this just because of much higher early prepayments? Or is the market shifting, that you see generally less business for renewals and have to look for newly acquired business more?

Secondly, just to understand regarding your payout ratio. What has changed versus the previous years that you can now go above the 80% hurdle, which seemed impossible looking at last year's level?

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Hermann Josef Merkens, Aareal Bank AG - Chairman of the Management Board [43]

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May I start with the last number, so to speak? As I said, sometimes we have to try out a little bit and even step by step. And even the ECB is acknowledging that you should not stick to a precise 80% number. I do not have the dividend in my head. If you can...

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Marc Oliver Hess, Aareal Bank AG - CFO & Member of the Management Board [44]

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(inaudible)

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Hermann Josef Merkens, Aareal Bank AG - Chairman of the Management Board [45]

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Yes, yes. But if you would have stick to the 80%, we would ended up in 1.9, I don't know what.

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Marc Oliver Hess, Aareal Bank AG - CFO & Member of the Management Board [46]

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Around [95].

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Hermann Josef Merkens, Aareal Bank AG - Chairman of the Management Board [47]

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So we simply tried to look into whether they are really sticking to precise 80% or whether there is some room for maneuver. And we found out there's some room for maneuver. Okay. So now we are -- so we are working for that. So there's no magic behind that, to keep it short.

And the second one?

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Marc Oliver Hess, Aareal Bank AG - CFO & Member of the Management Board [48]

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Yes. Regarding renewals. So first of all, you're right, in Q4, we hardly had any renewals. However, I wouldn't over-interpret the development of a single quarter.

Nevertheless, it's correct that the turnover in the market has decreased in 2019 compared to 2018 on a global basis by 8%. That is true for Europe as well. In the U.S., it was 5% and in APAC, it was even more than 10%. So investors, let's say, look around, they have more opportunities, and this is reflected in the renewal number. However, for 2020, as said, we are confident that overall, regarding new business, we will be on a similar level, maybe even a little bit higher with regards to the real new business or not with the renewals compared to 2019.

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Jürgen Junginger, Aareal Bank AG - MD IR [49]

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So the last on the telephone list is [Jacob Lichva].

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Unidentified Analyst, [50]

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I'll come back to the ICAAP share, apologies, but you guys are the first one probably to bring up this. So I guess, that's why I have so many questions. But with respect to AT1 or the AT1 that you have. On one hand, you're saying that AT1 with normative triggers are not accountable anymore. Then you're saying that the interim grandfathering of existing AT1s is unlikely, from your point of view. But at the same time, can you confirm whether the current AT1 is still included in the economic capital? And on what basis? I mean is it some, I don't know, call it quasi-grandfathering? Or maybe it's not included, but it seems like based on the second bullet at the bottom of the slide, it does say it is included in the ICAAP. So that's number one.

And number two, maybe something obvious and maybe something I have missed from the call. What was the jump in the CET1 quarter-on-quarter? I think it was over 2 percentage points between Q4 and Q3.

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Marc Oliver Hess, Aareal Bank AG - CFO & Member of the Management Board [51]

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So regarding the existing AT1. As just said, the ECB stated very clearly in the Q&A that new AT1 will not be useful to ICAAP capital anymore. The current still is as of year-end 2019. And the ECB indicated that they will make a decision regarding a potential grandfathering in the first half of 2020.

Nevertheless, from what we hear from market participants, and this is what we hinted, it seems to be unlikely that this will be grandfathered. This is all we can say.

The second question was regarding the Basel III. What was development in the fourth quarter, if I got it correctly. It increased by 2.5 percentage points, so that's right. That was, one, of course, due to the volume reduction. Please remember, we were at EUR 28 billion in Q4. We said that this is a level we didn't want to keep. We also said that we did some specific loans in Paris where we went for syndication. This is why syndication was at a record level in Q4 with EUR 900 million. So here, we delivered.

The second point was the derisking. That clearly helped. And then, and this is only true for Basel III, we also optimized the process of using collateral to decrease the LGD, and therefore, it's only affecting Basel III because the LTVs, which are more important for Basel IV, are not positively affected from that. Yes?

Then also in capital, I think like many other banks, we saw a slight relief from the pension provisions, given that interest rates rose the only quarter in 2019 in Q4, and this all led to that increase of the Basel III ratio of more than 2% in Q4.

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Jürgen Junginger, Aareal Bank AG - MD IR [52]

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As we're running out of time, one last quick one. And I think Philipp has not asked, unfortunately.

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Unidentified Analyst, [53]

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Just one quick question. I'm not sure whether I missed this, but could you please give an outlook for the new business margin development in 2020?

And also regarding the composition of the portfolio. Do you think this will change year-on-year? So basically, the question is which regions or countries are you a little bit more cautious and which do you see more attractive in the current year?

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Marc Oliver Hess, Aareal Bank AG - CFO & Member of the Management Board [54]

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Okay. So I'll take this one, too. We expect, again, lower business volumes in the market and also remaining pressure from other participate -- other participants entering into the market. So we expect the new business margins somehow below what we were able to realize in 2018. So mainly in the range or at the low bottom of the range that we gave for you as an indication for 2019, too.

Where are our emphasis? That is still the U.S. I mentioned before that our target is to increase the share -- or not the U.S., North America to be more precise, that we intend to increase the share of the North American portfolio to 1/3 of our total portfolio. We are currently at 30%, so we want to grow it there, too. Then, of course, Europe remains a focus where we do selected new business. We don't have a focus on Italy, obviously. We are still reluctant to do new business in Turkey and in Russia. Here, we are decreasing our portfolio, and we are continuing our expansion in Australia.

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Jürgen Junginger, Aareal Bank AG - MD IR [55]

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Thank you from my side for the question. Thank you for being here. And last words, Hermann, please?

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Hermann Josef Merkens, Aareal Bank AG - Chairman of the Management Board [56]

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Yes, last words, as I do have a flu, maybe some comment on virus or how we look into our portfolio with -- on that end. You may have noticed, and Marc elaborated on that, that our overall portfolio quality improved in 2019 dramatically. So we are now with close to the 0% development, clearly indicating that most part of our portfolio is income-producing.

And on that end, we are clearly preparing measurements if needed to short-term bridge liquidity with a fairly high repayment if markets catch up after everything cleared up, I would say. And that's, so to speak, our base assumption that clearly, we will see some interruption in business moving through 2019.

Will that affect our portfolio negatively? Maybe. I don't know, to be honest. But at the very end, as I indicated, as we've been around, as SARS was in the world, we clearly know how to deal even in that type of environment.

But coming back to our overall outlook and midterm outlook, I think we've demonstrated a quite good and strong development in 2019. We presented early January our Aareal Next Level program, which I would think is really the next level for the different business activities we are running.

We will be more transparent by the new segment reporting from Q1 onwards, so that you clearly could indicate and track the KPIs and performance indicators.

And yes, that's it from my end. Thank you very much.

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Jürgen Junginger, Aareal Bank AG - MD IR [57]

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And for the people here, we have a little late breakfast for you if you'd like to join us. Thank you.