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Edited Transcript of PBB.DE earnings conference call or presentation 4-Mar-20 10:59am GMT

Full Year 2019 Deutsche Pfandbriefbank AG Earnings Call

Unterschleisseim Mar 6, 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




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 cancelled 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 and 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 apps 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

[Bay 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 Bay 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 will help -- this should 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 216. 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 -- right 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 Bay 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 anticipate in 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 Bay 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 them 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.

A 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 region 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 cost 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 continued 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. I might have just recently lowered its growth projections for 2020. So in a nutshell, low interest levels to 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 was 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 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 move to our new head -- or release 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 flaws, i.e., having flaws 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 flaws while clients insist to lower flaws into negative territory. We try to resist that, but zero flaws 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 at -- 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 50 million increase to the reserves compared to last year, i.e., EUR 33 million in total, against EUR 19 million in 2018. Three new cases and one 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 -- (inaudible), 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 199 to 202 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 is [discounted] 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 cost 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 Bay IV . Strategically, we pursue two effects. The first one is we anticipate the effect -- expected effect of Bay [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

Bay IV levels.

With the B IV -- with the Bay 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, zero-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 EUR 0.75 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, bank underscores its conservative positioning and reliable continuity by holding onto throughout the 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%.

US 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 and moderate growth, public investment finance on hold and value portfolio and run down. It is, however, noticeable that contribution margin from public investment finance and value portfolio still remain significant with a combined NII of 68, which is 15% of the total 458 NII of the bank.

But -- and that as it goes on 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 31st of December 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 funds portfolio of 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 profit remain intact. That goes for LTV on new business and stock, which came down 5% over the last 5 years, and it continues grow. 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 also called 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 revaluating-driven only, triggering OTV 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.

Frankly, banking -- sorry, frankly, funding stands at EUR 2.9 billion issuances, dominated by benchmark issues, of which EUR 1.6 billion or 2 benchmarks plus 2 taps on Mortgage Pfandbriefe, $650 million on US 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. There'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 year's? The answer is easy. It goes with the maturities of the year. And why did we have less mortgage fund [between] more senior and secured? Again, it goes along with the maturities, which, by the way, on senior unsecured are shorter than on fund brief. 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 fund reserves -- mortgage fund reserves 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 will likely 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 of 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 180 to 200, 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 standards 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


Michael Heuber, Deutsche Pfandbriefbank AG - Head of IR / Rating Agency Relations [1]


Thank you, Andreas. We have so far registered 1 question. (Operator Instructions) First 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 that 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 GP 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 it was just that there's two parts here. First of all, it looks like your Basel IV other than the 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 1041A. 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, in 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 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 two 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 -- it looks like I got a terrible echo. Yes. I was thinking there would be a -- sorry. I think there's a static here. I would (inaudible)


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 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.

Any other questions?


Michael Heuber, Deutsche Pfandbriefbank AG - Head of IR / Rating Agency Relations [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 in 2020? And what's -- into what kind of leverage ratio will this translate?

And 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 on 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 still 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 [selection] 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, it should, in any case, do two 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 or 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.


Tobias Lukesch, Kepler Cheuvreux, Research Division - Equity Research Analyst [11]


Yes. Thank you very much.


Michael Heuber, Deutsche Pfandbriefbank AG - Head of IR / Rating Agency Relations [12]


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 two more people registered questions.

First, Philipp Hasler from Pareto and then Johannes Thormann from HSBC. Philipp, please go ahead.


Philipp Häßler, Pareto Securities, Research Division - Analyst [13]


Yes. This is Philipp Hasler 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 the spike -- or not spike, before the deterioration of the market environment?


Andreas Arndt, Deutsche Pfandbriefbank AG - Chairman of Management Board, CEO & CFO [14]


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, Markus, surely 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 there 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 line 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 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 [15]


That brings us to Johannes Thormann. Johannes, please go ahead.


Johannes Thormann, HSBC, Research Division - Global Head of Exchanges and Analyst [16]


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 uptick times where you're more careful nowadays? And where do you expect to do your new business, in which regions and uptick that carriers?


Andreas Arndt, Deutsche Pfandbriefbank AG - Chairman of Management Board, CEO & CFO [17]


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 contrary and the -- sorry, the portfolio composition which we have as of end of the year. And that shows two or three things. Main markets remain, Germany, the United States and France. And C -- on a smaller scale, CE, 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. should be careful. But this is where we, I'll say, more reluctant to pursue business, to be a bit more cautious on my wording. And I think that goes without saying. So it is offices. It is residential what we look at. And that is the bulk of the business, which we also see the first and second quarter coming through.

The -- on green finance, do we expect or would we expect ourselves to benefit from that? Are there pricing advantages? Yes, there might be a very small pricing advantage. The biggest advantage, which I see is in terms of -- it's an indirect advantage. You have a good liquidity in green funding. And that is something, which we will take use of. It's an investor diversification. You have a large number of names now being very much after green investments. And those are the ones which you open up for this kind of product.

The question is -- and that's not the reason why we do it because I think it would be stupid reason, but it's a point which is coming through ECB and EU Commission that perhaps some perks being added to your capability to issue green bonds or to provide green assets were sort of, how would you call that, sort of support on that side is being mixed up with regulatory work. That's why I don't like it. But that's something, which may come, may induce banks to go further for green financing and green loans and green bonds.


Michael Heuber, Deutsche Pfandbriefbank AG - Head of IR / Rating Agency Relations [18]


We have one follow-up question from Nicholas Herman. Nick, please go ahead.


Nicholas Herman, Citigroup Inc, Research Division - Assistant VP and Analyst [19]


I'm just going to give this one shot. If it works, then great. If it doesn't, then can you hear me?


Andreas Arndt, Deutsche Pfandbriefbank AG - Chairman of Management Board, CEO & CFO [20]




Nicholas Herman, Citigroup Inc, Research Division - Assistant VP and Analyst [21]


Can you hear me? Hello?


Michael Heuber, Deutsche Pfandbriefbank AG - Head of IR / Rating Agency Relations [22]


Yes, we can. Nick, please go ahead.


Nicholas Herman, Citigroup Inc, Research Division - Assistant VP and Analyst [23]


Okay. So I just had one -- I had one follow-up, please and one additional question on margin. So I guess 2 follow-ups. there's two follow-ups. On risk costs, I was just -- I guess I was just a bit surprised that you saw such a significant deterioration in the environment. This is even prior to coronavirus. And I guess, just trying to understand what it was that you kind of recognize -- you were seeing in particular that caused that? And I guess that's the first thing.

And then secondly, on margin, just one other question on funding costs. I just wanted to ask, if spreads remain where they are on the funding side, what size of funding benefit do you think that it could be? It looks like it could be as much as 30 to 40 basis points. Is that something you can confirm, please, over a prolonged period of time?


Andreas Arndt, Deutsche Pfandbriefbank AG - Chairman of Management Board, CEO & CFO [24]


Okay. On the margin side, Nick, I'm not quite sure whether -- I'm not quite sure whether I understood which benefits you may mean. So perhaps that's another point we can take -- we take up off-line. And risk cost, what reason we had sort of prior to corona to increase the levels of risk provisioning, I think the -- it's a combination of two things. First of all, it is a sort of general uneasiness about the overall market development and the commercial real estate development. Being in the 10th year of the cycle basically means at some point in time, things need to come down. Is that very specific note? It's not. But I mean, if you look at the development over the last 6 months, geopolitically, international trade wise and so on, I think there are enough symptoms which need to be attended to. The other point is where it sort of crystallizes in a more direct way is my example of low property yields. If you have a property yield of 2.5% and the yield requirement increases from 2.5% to 3% or 3.5%, that's a 30% discount on your -- depending on what you calculate. But that's 30% on your valuation.

Now valuation is important to the provisioning because valuation is part of the LTV covenants. And if you run against LTV covenants, you have to do something about that. So that does not necessarily mean that the client is bad. That does not mean that the cash flow is not working. But it means that you have a provisioning requirement, and you have to do something. So -- and with these low levels and yield, which we see, we also see a proportionate increase in risk on the revaluation of property. And somehow, without having concrete places on hand, we try to reflect that in a higher calibration of risk costs. And I think it's not outrageous and not out of the way if we say, in such a situation, we increased from, say, 12, 15 basis points to 18 basis points. That is not so much. Some people may actually uphold as it's still not good enough or not enough in terms of overall calibration.

So those are the very -- not very scientific reasons for the way we went about risk cost. And we hope we're right with it. And the other point we take up bilaterally. Thank you.


Michael Heuber, Deutsche Pfandbriefbank AG - Head of IR / Rating Agency Relations [25]


Thank you. Well, we worked through our list, and I'd like to take the opportunity to thank you for joining us today. It was a pleasure, and we promise we'll be back in May with Q1 results. And of course, we look forward to speaking to you in the meantime. Thanks again. Take care. Bye-bye.


Andreas Arndt, Deutsche Pfandbriefbank AG - Chairman of Management Board, CEO & CFO [26]


Thank you.