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Edited Transcript of PBB.DE earnings conference call or presentation 11-Nov-19 10:00am GMT

Q3 2019 Deutsche Pfandbriefbank AG Earnings Call

Unterschleisseim Nov 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Deutsche Pfandbriefbank AG earnings conference call or presentation Monday, November 11, 2019 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andreas Arndt

Deutsche Pfandbriefbank AG - Chairman of Management Board, CEO & CFO

* Walter Allwicher

Deutsche Pfandbriefbank AG - Head of Communications

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Conference Call Participants

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* Benjamin Goy

Deutsche Bank AG, Research Division - Research 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

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Deutsche Pfandbriefbank AG conference call regarding Q3 2019 results. (Operator Instructions)

Let me now turn the floor over to your host, Mr. Walter Allwicher.

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Walter Allwicher, Deutsche Pfandbriefbank AG - Head of Communications [2]

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Good morning, and a very warm welcome from Garching, and we're very pleased that you are attending our Q3 results call this morning. Here with me is Andreas Arndt, our CEO. Andreas will lead you through the presentation. And, of course, be available for your questions after that. Andreas, the floor is yours.

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Andreas Arndt, Deutsche Pfandbriefbank AG - Chairman of Management Board, CEO & CFO [3]

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Good morning, and welcome to our analyst call regarding PBB's third quarter results for 2019. As you have all seen, I suppose, we have provided you with a little surprise already on Thursday. So I think the frame is being set. There shouldn't be any further surprises today. But I -- or you would rightfully expect some more details, and I would expect some more questions to come.

To put it very briefly, third quarter was another good quarter for PBB. Business-wise, we expect good momentum to extend into 2019 fourth quarter. But on a whole, we remain cautious on markets and risk consume, high-risk costs to come as well as higher administrative expenses in Q4. Against this bare background, but especially with a view on quarter 4 developments, we have been able to increase PBT guidance for the full year to the range of EUR 205 million to EUR 215 million, as already communicated in last week, Thursday evening.

With that, we turn to Page 4, which is the summary of highlights for the first 9 months. After already good quarter, second quarter 2019, PBT came strongly once again at EUR 70 million in Q3 compared to EUR 49 million last year, bringing the 9 months figure 9% up to EUR 187 million year-over-year. NII remains on reasonably high level, mainly reflecting high strategic Real Estate finance -- financing volume and reduced funding cost. In addition, the result benefited from higher prepayment fees.

The second point noteworthy is risk provisions are stable year-over-year. And again, I should say, below plan, but in line with market expectations. After nearly 0 level in previous quarters, additions in quarter 3 are resulting from further valuation adjustments on U.K. shopping centers.

The general admin expenses were slightly up, as expected, especially driven by regulatory projects. And the new business continues to run well, with a volume of EUR 2.6 billion in Q3 and EUR 7.2 billion for the first 9 months, up from EUR 5.9 billion last year, there of EUR 6.9 billion relating to our core Real Estate Finance business. That's a development, I think a gratifying volume development despite the fact that we keep a tight rein on credit standards.

Even more gratifying, I would say, is the average gross interest margin development. It further increased in Q3, bringing the margin for the first 9 months to more than 150 basis points now. And that's close to full year 2018 levels, which we stated with around 155 basis points.

As a result of our selective approach, and to be clear, without compromising risk standards, our LTV stay stable at 59% commitments. It is, I think, an overall achievement, both volume-wise and margin-wise, which is very acceptable.

The strategic Real Estate Finance portfolio developed flat quarter-over-quarter, but increased almost EUR 1 billion year-to-date, which is a 3% increase and EUR 1.5 billion or 6% year-over-year increase, which I think especially reflects the good new business over the last quarters.

Public Investment Finance is nearly stable as a whole. Proposition and value portfolio reduced according to plan by almost EUR 1 billion rundown. Funding activities remain strong. We generated a volume of EUR 5.5 billion, which is EUR 1.3 billion more than last year. Comparable figure is EUR 4.2 billion. But what is more important, even though funding spreads have increased, I'll come to my favorite chart later on -- have increased year-over-year, the average issuance spread levels stay below maturities and thus supporting NII.

Capitalization continues to be strong at CET ratio of 18.3%, providing an adequate buffer for regulatory changes to come, i.e., much quoted, the targeted review of internal model, the new EBA guidelines and Basel IV expectations, so the trinity of regulation which we have to expect in the months and years to come. We will discuss details on that later on.

Let me turn to Slide 5, as usual, to provide you with a comprehensive overview on the operating and financial views on drivers. In short, new business runs well at total of EUR 7.2 billion, while continuing our selective approach. This is, by the way, the first time since I report bank figures that we managed to present an even and balanced development of new business who, over the last 3 quarters compared to the heavily back-loaded figures in previous year-end quarters, which in a way may raise the question whether our full year guidance of EUR 8.5 billion and EUR 9.5 billion is still realistic. But to put that clear at this point in time, although our pipeline could supply new -- could supply higher new business, we will drive cautiously into fourth quarter. And we'll stick to our guidance, which we gave out some time earlier.

Strategic portfolio are increased in a row to 73%, almost 75% now, which is good. And as you can see from the quarterly run rate, NII and NCI holds up nicely. We did explain the drop between EUR 115 to EUR 113 last time, last quarter. Risk cost, as mentioned, fairly steady. And operating costs, I would say, under control, with a cost income ratio around 42% and a cost income ratio to be expected by year-end still below 45%. This all brings PBT to EUR 187 million for the first 9 months and makes us confident to reach full year PBT level in the range of EUR 205 million to EUR 215 million despite further risk provisioning and further regulatory expenses and investments in Q4.

Let me, as usual, in this sequence, give you sort of our latest update on markets, obviously, markets developing. All in all, the current picture on commercial real estate markets remain still quite supportive in most locations and for most property classes. Despite recent declines, the commercial real estate investment volumes remain on solid levels, having recovered in Q2 from weaker levels in Q1 in the light of slowing economic growth, high prices, a challenging task to source suitable properties and suitable transactions and geopolitical and overall economic uncertainties.

So European commercial real estate investment volumes increased again to nearly EUR 60 billion in Q2, which is 10% below last year's figure, but still well above the 10 years average. Furthermore, owed to ECB's latest interest rate decision and monetary decision, we still see a solid take up levels in Continental Europe, the G7 cities in Germany, with still slightly rising rental levels and again, lower yields. And we also see visibly less demand for large-scale rentings at the same time. So there's a clear division line between Continental Europe and U.K. yields to be observed since already more than 12 months.

That, again, corresponds with, by and large, low office vacancy rates. As we mentioned before, retail remains a critical topic not only in the U.K. but also in Continental Europe. Structural changes in retail are also coming to CE now. But in general, and that's sort of the focus for anything we do in retail, the focus is on the winning propositions, which are central locations within good reach and with a nice environment in a city's high-quality and entertainment value and add-on experience, good viability for neighborhood centers and specialized centers but high-pressure on standard outlets, secondary locations and so on, all things which we have already described in past calls.

Logistics is still interesting. Last mile logistics is very much in demand but is rare. And local communities tend to be very much against, in Germany, you call that betonieren, so concreting of the neighborhoods, given little employment effects from new logistics.

Residential is an interesting topic. Local governments remind us that they have the same local residential markets. While there's general willingness to be supportive in providing building permits, rental caps and things like that are far from helpful. In Germany, we expect the Berlin phenomenon to spread further depending on the political denomination and special situation of the respective cities, but we also expect only moderate impact on prices as we go along given the overall stability of this property class.

And the other challenge is -- you may call green. Green is and will be the next trend. With CO2 carbon pressure mounting, there will be more demands, regulatory demands and political demands for future energy saving standards, potentially with effect on commercial real estate prices for less than standard existing stock. And that's something which we also have to take into consideration.

However, having said all that, the prevailing market sentiment on commercial real estate is still positive. The feedback from the Expo Real, which we had here in Munich 4 weeks ago, was predominantly on the positive side, much influenced by the still ongoing and even more pronounced search from investors for yield. That's, at the first side, still supportive, quite supportive, but as already highlighted couple of times before, slowing economic growth, individual market developments such as Brexit, retail and co-working space urge continuous cautious attitude and as such, we stay selective. We focus on quality. And we are especially cautious on U.K. retail. So no change to what we said last time.

With that as a background, let me now turn to Page 9, which is the summary of our financial performance. As usual, I will go into the key points, NII, risk and admin on the following pages. Let me -- or allow me for a few comments on fair value and other operating results.

Fair value measurements accrue to minus EUR 2 million for the first 9 months, with a positive EUR 2 million in Q4 after supporting ECB's decision on lower interest and subsequent market reactions also on the severance side, notably for Italian spreads. So not much of a development there and the positive development being driven by the ECB decision.

On operating results, it's a balanced figure. So we have some negative FX effects and provisions, which are compensated by some other positive effects such as VAT refunds and things like that, but all within very civilized proportions.

With that, let me go to NII on Page 10. NII is up 2% year-over-year, which given the size of the increase in average volumes, may seem a little bit low. However, when looking at the asset side of revenue contribution from our strategic portfolio and sort of allowing for asset side consideration only, NII would have increased by 5% to 6%. But a number of adverse trends erased that positive momentum or reduced that positive momentum. First of all, NII continues to benefit from floor income as interest environment continues to stay negative. However, even though interest rate have turned more negative quite recently, income from floor stays below last year's figure.

And the second point is NII also suffers from the rundown of non-strategic value portfolio and lower income from equity book, which is the result from the further downward trending on interest rate environment. The latter, i.e. the dwindling contribution of the equity book is, by the way, the largest impediment or the largest pushback to NII growth. And here, that's also to be noted. We refrain from further investments because they're coming with negative rates. And we also refrain from increasing average maturity on the book, which we believe not to be prudent at this point in time. So negative contribution from that side.

Now what has increased NII and what has provided positive support were, a, the reduced funding costs, even though funding spreads have increased in line with the overall spread widening in the market year-over-year. We continue to benefit from a further reduction in funding costs as new issuance spreads are below the legacy cost of maturities. And what else is structural shifts from non-preferred and deposits to senior unsecured preferred.

And the second point, of course, is the volume growth itself. We did observe an average strategic portfolio growth of Real Estate Finance by EUR 2 billion, up to the level of EUR 27.5 billion in September 2019, which did well for overcompensating for the loss in gross margin versus stock and other adverse effects.

What also did help was EUR 8 million higher income from realizations year-over-year, which basically and mainly reflect higher prepayment fees. That comes from -- that does not come from more volumes being repaid prematurely, but comes from -- so we do that more or less the same volume size of prepayments as we have experienced before. But they were prepayments with higher margins, longer-dated maturities and higher average breakage cost attached to it. And to be fair, also with 1 one-off which did help the total figure quite considerably.

Turning to Page 11 on risk provisioning. Risk provisioning came in at EUR 12 million for the quarter as well as for year-to-date in line with market expectation and stable year-over-year, but again, below our plan or our guidance. On one hand, we had a EUR 15 million gross additions in Stage 3, resulting from valuation adjustments for shopping centers in the U.K. You remember, we did say we have 3 or 4 of them, which are under special care and special observation. We have one new case now. We have, more or less, stable performance in the other cases. And we have one case, which we were able to delist from our register because the property and the transaction was sold on last week without any further significant additions to risk cost. Against this picture, we have EUR 6 million releases in Stage 1 and 2, mainly due to positive effects from maturities and revaluations in the third quarter.

For Q4, and that's a bit of a sort of outlook and looking ahead. For Q4, we would expect or we would be planning for further risk provisions in form of general loan loss reserves as persistent economic uncertainties are expected. We would like to reflect higher perceived risk and more conservative risk parameters that we'll make use when it is possible of more -- of the more flexible regime of IFRS 9, which allows for forward looking view, i.e., expected loss as opposed to the so far used incurred loss approach under IAS 39. We believe that irrespective of the still ongoing positive business and market momentum, precautionary increase in general loan loss provisions is desirable and reasonable move, always assuming that the economic circumstances in Q4 will corroborate our present presumption.

One word on Stage 3 re: coverage ratio. It is down to 12% from 19% before due to low coverage ratios of the new additions. It's approximately EUR 200 million, which we did add on. And there's EUR 100 million, approximately EUR 100 million on a new -- on a retail shopping center, close something of 20 -- of EUR 90 million, EUR 94 million for an ECA financing that has 100% coverage from a ECA agency, but they do not take into account the full collateral, which we hold against that. As you know, and as we -- not tiring to repeat, we consider this 100% covered by appropriate securities and collaterals.

Turning to Page 12, which is general admin expenses and depreciation. Operating costs, up quarter-over-quarter and year-over-year. However, and that's important, and that's important to me to say and to state, personnel expenses are nearly stable at EUR 85 million against EUR 84 million, which we saw in the 9 months quarter 2018.

This is a -- for one, this is a reflection of the stable development in FTE numbers at a level around 750, with all the small fluctuations. It is a reflection of the discipline, which we have in terms of wage inflation. And it is also the effect of counterbalancing measures and the focus in invest, which we did describe some quarters ago. So what has increased, in fact, is non-personnel expenses increased to EUR 56 million, which is EUR 4 million up against last year, which is mainly the result of regulatory projects and IT cost.

Again, looking forward, looking into fourth quarter, we would expect further cost increases from regulatory projects and digitalization initiatives. That should be more or less in line with the increase, which we did see fourth quarter of 2018.

Depreciation is not captured under GAE or under general, admin and expenses. But write-downs are now to be reflected as a separate line. So far, there's only limited to a slight increase in depreciation owed to IFRS 16 reclassification of leases. Now that will be more for the time to come as we continue to invest and as that's been more reflected on the depreciation line than on the G&A line.

Let me turn to new business on Page 14. Most of the things have been said. So it's a short reflection of what you find on Page 14. Total new business volume reached EUR 2.6 billion and EUR 7.2 billion for the first 9 months. The lion's share, again, of -- and of course, coming from real estate funds with EUR 2.5 billion on the quarterly isolated figures and EUR 6.9 billion on the 9 months figure. Despite higher volumes, I don't get tired of repeating that, despite higher volumes, we adhere to our selective approach and remain cautious and do not compromise on the risk side, i.e., reflected in the ongoing LTV commitments flat for 59% as we go along. This is the reason why we stick to our full year guidance of EUR 8.5 billion to EUR 9.5 billion for Real Estate Finance as a whole for the entire year. So we will not go into repeating the fourth quarter volumes of last year, but we'll take a very disciplined and very straightforward approach there.

The most important market remains Germany, with 46% of new business versus a portfolio share of 49%. With regards to property type, our focus remains office properties, again, with a share of 56% versus 44% in our portfolio.

The used business advanced to become the second largest single market with a new business share of 14% in the first 9 months, while still accounting for 9% on the portfolio. And as already stated a couple of times, especially U.K., 7% new business there versus 12% of portfolio. And retail properties, we remain particularly cautious.

As I've mentioned already, besides volume numbers which are gratifying, margin development is even more gratifying, the average Real Estate Finance gross interest margin further increased in Q3, bringing the margin for the first 9 months to more than 150 basis points, and thus, almost back to full year level 2018, which were around 155. And if you remember, and the way you remember, the first quarter did close with 130 basis points. And as the 150 plus for the 9 months is an average figure, you may easily deduct from that. That second and third quarter were well above the 150 average figure.

I skip Page 15. That's more detail on the segments. If there are questions later on, I'm happy to take them. I would march straight on to portfolio profile, which is very much the usual picture. We, I believe, still hold on to high portfolio quality. LTVs stands at 54%, with only small fluctuations in the different regions and investment-grade share on the -- of the portfolio stable at 95% all over the place. The comments on U.K. and Italy, I'll leave for your reading because it's been more or less unchanged for quite some time.

NPLs were down significantly after release of the UK-3 assets in Q2. That's the EUR 205 million you see on Page 18, with the 0.3% NPL coverage ratio. Now this is back to 0.6% and EUR 395 million as a result of the 2 additions to the NPL portfolio which I just described to you. Otherwise, there's not much more to mention. Although I should mention, sorry, I should add that the U.K. shopping center, which makes up for around EUR 100 million, there's low risk provisioning attached to it. It's an LTV breach -- covenant breach through -- and subject to new valuation, but there's no payment default attached to that exposure. And the other one is 100% ECA guaranteed public investment finance loan. It's an aircraft financing, which is fully guaranteed through Euler Hermes, with no NPL need or no provisioning needs attached to it.

Funding, that's Page 20 and 21, with 21 being my preferred chart, still holds what we kept on saying. If you look at the bulk of funding which we effected in 2018 that came through in the first half of the year at exceedingly low levels and the bulk of the funding which we did in 2019 came through in the first and second quarter of 2019 at much elevated level. So there's no surprise that the year-over-year comparison between 2018, 2019 due to the market movement, is still showing a significant increase in funding levels. However, as mentioned before, we still find ourselves below the average -- the average margin of the average spread, which we have on our funding portfolio.

Funding activities did remain strong throughout 2019, with a volume of EUR 5.5 billion, which is EUR 1.3 billion more than last year and an increasing share, with foreign -- of foreign currencies to be noted. Three examples. Given we did issue EUR 600 million used on a Mortgage Pfandbriefe benchmark in May and tapped another EUR 50 million in September, we did add another CHF 125 million unsecured benchmark in June. And on top of that, we did SEK 6 billion, which translates into roughly EUR 550 million. That, as a total, makes roughly 20% of the overall funding requirements, which we consider to be quite an achievement of our funding activities.

Now coming to capital. Capitalization remains strong, as you can see from Page 23, with a CET1 ratio of 18.3%, down from 18.5% year-end 2018. Main driver for the decline in Q3 is an increase in risk-weighted assets from EUR 13.6 billion to EUR 14.3 billion, reflecting strong new business, while recent RWA reductions have been driven by recalibrations of risk parameters. So the capital position and the year-over-year comparison is nearly stable, and so is the CET1 ratio.

On Page 24, you'll find the picture, which I think is more or less familiar to you. This is to update you on previous communication on what we expect to come in terms of additional risk weighted assets from targeted revenue of internal models, i.e., the ECB inspections from new EBA guidelines and from Basel IV requirements. While we have given ranges so far, we try now to be more specific by the way -- by way of forward-looking RWA calculation, which we consider to introduce as a regular reporting item by the end of 2019 with Q4 reporting. Not very surprising, the pro forma comes out at EUR 18.5 billion new RWA, which is right in between our guidance of EUR 4 billion to EUR 5 billion add-ons and leaves us with something approximately above 14% CET1, again, well within our guidance.

By changing the reporting format from next quarter onwards, we would, so we believe, and so we intend, increase transparency and satisfy market expectations. If you just look at what international banks do, which have incorporated this fully loaded figure since some time, I think it's the right step to undertake. And it would make new RWA requirements more visible and more precise. So much for the precursor on Q4 reporting. Materially, as I said, not much of a change against previous guidance and on forthcoming RWA requirements.

Now with that, let me come to the summary and the outlook. PBB continued its good operating performance in Q3. Even though remain very selective, new business remains solid. And because we remain selective, we can show positive margin development in 2019. NII continues to be strong and above our initial plan and forecast, complemented by higher prepayment fees, while risk provisioning and operating costs were in line with expectations.

On this background or against this background, and especially in view of Q4, we have been able to increase our full year guidance to EUR 205 million to EUR 215 million from former upper end EUR 170 million to EUR 190 million, despite expected higher expenses from, i.e., persistent or increasing economic uncertainties, which we expect to result in precautionary adjustments of risk parameters and those risk provisioning. I repeat our initial planning, which is also the guidance for fourth quarter, our initial guiding, which was targeted around 10 to 15 basis points on our Real Estate Finance portfolio. And furthermore, we will have a cost increase from -- and we expect a cost increase from regulatory projects and digitalization initiatives, i.e., investments onto the future.

And perhaps a very last word on our digitalization investment. I'm very satisfied with the development of our digital ventures. And there are notably 3 points to report. First of all, we expect to come out with a solution on the portal solution to clients by the second quarter 2020, which in many ways will be transformative, both for the way how we communicate with a client as well as a starting point for building a viable real estate finance or commercial real estate platform for loan syndication and loan placements.

The second point is we're making progress, digital process, so to speak, in efficiencies of processes, partially through what we've designed and what we intend to work with the portal because if you change the interface between client and the bank, you also change something in the processes within the bank, which should end up in a more efficient process, credit process and operational process.

And the other point, still under the headline of efficiencies, usually we associate robots only with firms like Bosch or BMW or whatever. You can find robots in the bank, and they're actually helping to alleviate the day-to-day work, and we increasingly make use of that.

And the last point is CAPVERIANT. This is to report that the offers in the system exceed EUR 1 billion by now. On the actual transaction side, we are still lagging behind significantly. But to have acceptance on the offering side, to the extent which I just said, I think is very gratifying, and we're making progress in terms of business. And we're making progress in terms of cooperations, which we find.

So that's my update to the third quarter. Thank you very much for listening in, and I'm happy to answer questions now from your side. Thank you for attending.

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Questions and Answers

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Walter Allwicher, Deutsche Pfandbriefbank AG - Head of Communications [1]

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Thank you, Andreas. We'll jump right into the Q&A session. (Operator Instructions)

And so far, we have 4 people registered: Nicholas Herman, Tobias Lukesch, Benjamin Goy and Johannes Thormann. We'll start with Nicholas Herman.

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Nicholas Herman, Citigroup Inc, Research Division - Assistant VP and Analyst [2]

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Three, if I may, please. Just to come back to what you said on the outlook. You've upgraded your full year guidance. You saw the positive outlook for Q4. But at the same time, your guidance implies, I guess EUR 18 million to EUR 28 million of PBT in Q4 versus a quarterly run rate over the first 9 months of over EUR 60 million. So just to be devil's advocate here, why is that positive?

Second -- and that would be the lowest quarterly PBT, I think, since 2015. Second question is on margin. So really quite an impressive margin this quarter despite a very high proportion of residential and lower U.S. by the looks of it. At the same time though, your development finance book has ticked up a bit. So my question is, what percentage of new business was development finance, please? We discussed this development finance before. I think you had communicated that you don't expect it to go much higher. But again, it has ticked up again. So just to go back to that question.

And as you -- just one other part, secondly, on the margin. If you could just talk about the competitive environment, again, that would be helpful. Any competitive margin pressures?

And then the final question is just on capital. Just to confirm, there were no other factors behind the higher risk weights beyond new business because it doesn't imply that the new business risk weights are a fair bit higher.

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Andreas Arndt, Deutsche Pfandbriefbank AG - Chairman of Management Board, CEO & CFO [3]

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Okay. Now on risk weights, the driving force is definitely the new business. We have some, say, counterbalancing aspects, which actually dampening the growth, which are coming from recalibration of parameters, risk parameters as part of annual revenues and things like that. So but that's -- in terms of what you said, your understanding, I think is correct on that side.

Now we still hold onto saying outlook is positive. That's why we increased the guidance. But at the same time, I also said it's a good time to look at your portfolio and to determine the level of risk cost by which we want to go into 2020. And that's, by far and by most, the driving force. I mean you can do your calculation very easily. We're talking about EUR 10 million, which we have booked so far. When we say 10 to 15 basis points on the strategic book, that translates into another, say, EUR 30 million to EUR 35 million which come on top of the figure of EUR 30 million, which may come -- sorry, I'm not getting confused there -- EUR 20 million to EUR 30 million, which come on top of the existing piece. That's a significant change.

And the other point is, which I also mentioned, as we did in fourth quarter 2018, we will see, due to investments, due to ongoing regulatory project, a significant increase in the quarterly run rate. So I think the key message is twofold. One is, we consider the ongoing momentum still being good. That's what I said. And contrary to further -- to former forecast and former guidance, we do not believe that NII will go down fourth quarter, but will remain stable or even tick up slightly. So the operative momentum which we have is okay. The operative momentum which we have also on the expenses side, on the admin and -- general admin and expenses side is also okay. But there are factors which we cater for, and that's what I call investing in the future, stabilizing the ship and increasing risk parameters as part of the German [court's] attitude into 2019, 2020.

So it's not contradicting, but I think it is what you do. If times get a little bit rougher, you look at your house and you see what you need to do for firming up for windy times to come. Now that's on the outlook piece.

The second point is on margin. There's a slightly higher share of development finance in the third quarter. It is well within our self-set and self-imposed limits, which we drive. Otherwise, the margin increase has been very much across the board. And that shows the quality of it.

And that sort of ties into your third point, what is the sort of competitive environment for margin development. Now one thing is pipeline-wise and in terms of new business requests, we have seen, in 2019, an amount of deals and amount of transactions to an extent which we haven't seen before. So in a way, you can say we are very much in demand. But at the same time, we are very selective. So being selective is not only prerequisite on what we do risk-wise, but we also be -- we can afford to be more selective in terms of margins.

But there are 2 other things which relate to the market in general where we have observed a general uplift in margins from what we see and how I explain markets to myself over the last couple of months. And that is, a, with the low interest levels, the base rates, which institutional investors have to cope with on one hand, and the margins they required in the past, there's no way to install a decent yield to investors by sticking to the old margins. If you start with minus 30 or minus 40 bps on a euro base -- Euribor base and you add 70 basis points, you get something like 40, 50 bps on a yield on a carry, on your investment. That is something which you can't sell to investors. So there is also, for those who have been sort of damaging the margin development in the past, there's pressure to increase margins. And I think we saw that in a couple of cases.

And the other point is that people start becoming more conscious of the fact that Basel IV is not far away. And that the capital ratios need to be closely looked at also in terms of how much growth one can afford and how much that should reflect in margins going forward.

So there are 3 components: selection, institutional investors' behavior, pricing behavior and the regulatory pressure, which in our view, were positively on margins, and we were able to capitalize on that, and we are grateful for that. So there's...

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Nicholas Herman, Citigroup Inc, Research Division - Assistant VP and Analyst [4]

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Just a follow-up, if I may, please. I mean that is the most positive, I think I've heard you on margins in a long, long time.

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Andreas Arndt, Deutsche Pfandbriefbank AG - Chairman of Management Board, CEO & CFO [5]

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Yes. And I hope I'm right. I hope I'm right because it would be the (inaudible) [for years], which now extends over 30 years that a regulatory change actually affects changes to the margin.

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Nicholas Herman, Citigroup Inc, Research Division - Assistant VP and Analyst [6]

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Yes, I guess I'm just a little bit surprised. I -- my understanding was that a lot of the pressure was being driven by debt funds, who obviously are not going to be as exposed -- who are not going to be exposed to Basel IV. This is a -- so it sounds like even in the first -- there's repricing even on the non-bank side of things as well as on the bank funding side (inaudible)?

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Andreas Arndt, Deutsche Pfandbriefbank AG - Chairman of Management Board, CEO & CFO [7]

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Yes. But the problem with debt funds is sort of the category 2 problem, what I just described. And the same what I said to institutional investors also goes for them. You can only sell a fund, a debt fund, if you provide a decent yield profile. And you either get it by increasing margins or you going up the risk ladder. And to be honest with you, the working debt funds in the European context, not talking about the U.S., is slightly different there. But in the European context, the debt funds, which we did observe there, they all have difficulties in placing the funds when they do not provide a sufficient yield. Yes. And that either comes from higher risk or they turn towards development finance and things like that. Then you can still manage. So and we know that because we have been looking into the setup of debt funds a couple of times. And just now, we probably wouldn't do it. Yes.

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Nicholas Herman, Citigroup Inc, Research Division - Assistant VP and Analyst [8]

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Just I guess one last -- one final question. I mean when was the last time you were this constructive on margins?

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Andreas Arndt, Deutsche Pfandbriefbank AG - Chairman of Management Board, CEO & CFO [9]

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Sorry?

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Nicholas Herman, Citigroup Inc, Research Division - Assistant VP and Analyst [10]

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Do you remember the last time you were as constructive on margins?

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Andreas Arndt, Deutsche Pfandbriefbank AG - Chairman of Management Board, CEO & CFO [11]

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You mean positive?

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Nicholas Herman, Citigroup Inc, Research Division - Assistant VP and Analyst [12]

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In the past. Yes.

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Andreas Arndt, Deutsche Pfandbriefbank AG - Chairman of Management Board, CEO & CFO [13]

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Yes. Well, I think I just said it. I can't remember, sort of, well, my last 30 years in banking, that we did saw margin increases due to regulatory and market changes. Usually, margin increases come after a severe crisis and a severe reduction of credit supply. Yes, i.e., 2010, 2011, 2012. Yes. So I -- please take all that with a pinch of salt. Maybe I have to say something different in Q1 2020, but that's our observation just now. And it's a sort of practical observation. We see that in some of the cases where we declined proposals for transactions a couple of weeks ago due to margin reasons and profitability reasons. And we see some of them coming back to us and, say, you may want to consider on a different margin, which is also something which we haven't seen for a long time.

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Walter Allwicher, Deutsche Pfandbriefbank AG - Head of Communications [14]

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Next question comes from Tobias Lukesch.

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Tobias Lukesch, Kepler Cheuvreux, Research Division - Equity Research Analyst [15]

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Yes. Tobias Lukesch, Kepler Cheuvreux. Three questions from my side as well. First, on the reinvestment book, the equity book you mentioned. Could you remind us how big it currently is and what kind of volume runs down over the next quarters or years? It would be very interesting to get the either quarterly NII effect or the early 2020 revenue effect you have from the -- on -- or from the future non-investment of these tranches.

Secondly, on the new business book, I think you have been very clear that you will stick to the EUR 8.5 billion to EUR 9.5 billion new business guidance for '19. However, if you look at 2020, how would you think guidance could look like?

This is bringing me more or less to the third question around capital. I mean you have a very strong capital cushion. So how will you deploy that, a, via growth, I guess mostly organic or exclusively organic, I would expect?

Secondly, we may come back to capital return questions, right, with regards to dividends, maybe extra dividends or share buybacks.

Thirdly, would you still think you want to keep the cushion, even so you're now a kind of more -- or you're more concrete now around the above 14% core Tier 1 ratio. We do have some European banks now since everyone, I think is getting a better grip of EBA and Basel IV impact. I think some banks with a totally different business model, I have to agree, but are targeting rather 12% core Tier 1 ratio and have higher strip ratios than you have. So what is your thinking around that number since you're now more precise and you want to guide us a bit more, yes, tied to the new number?

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Andreas Arndt, Deutsche Pfandbriefbank AG - Chairman of Management Board, CEO & CFO [16]

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Well, to start with your last point, Mr. Lukesch, it is exactly the reason to be more transparent and to be so more forward-looking to say we want to have more transparency. We want to have a clear picture on what we think is a suitable capital adequacy for the bank. And that is not to return capital or to organize share buybacks. I think I made that point clear couple of times.

It is exactly what you said. Some banks already switched to a sort of Basel IV new regulation reporting, which we intend to do with fourth quarter results as well in order to signify that we do have a good cushion, but we do not have excess capital anywhere between, say 12.5% and 18%, 18.5%. So I think, and I hope I made that always clear that the bank's capital aspiration and requirement level is around 12.5% on what we have set out for ourselves. If we sort of stand between the 13.5% and 14.5% as we gave out as the a capital markets guidance, we feel comfortable on that side. And with all the guidance which we can give at this point in time, we would be suitably and comfortably within that range. And we like to remain within this range. So that's on your question number three.

Question number two, to sort of go by reverse order. Now the guidance, sort of the new guidance on new business would be closer to EUR 9.5 billion than it would be to EUR 8.5 billion, but it doesn't take much calculation to come to that conclusion. What it tells you about 2020, I can't tell you now because by good order of things, we will give our outlook for 2020 on the first press conference or the first analyst conference in the new year, which comments on 2019 full year results. I would leave it at that. If you want to have sort of a tendency from here and today and from my mouth, we're probably not going to be much more adventurous in terms of building new business. But we'll steer further on our cautious and conservative approach.

Now on the reinvestment book, what we call the equity book, I'm not quite sure whether we did set out the figure in the past. Mr. Allwicher is shaking his head. But the one end, which is quite easy to detect, and that is if you look at IFRS equity, you know approximately what we have as an equity book. So there's not a particular secret in that. What we do not unwind, and this is where, sort of I'll stick out my neck perhaps a little bit too much, is giving you a full breakdown in the different effects of NII, positive and negative developments on NII from the different books other than what we show under segmentational analysis.

All I can say, you may safely assume that, say, 3, 4, 5 years ago, we had a much higher yield on that portfolio than we have today. And if you do your own calculation, which you probably can easily do because of your capital markets experience, if you lose 1/3 on that revenue between last year and this year, it's a figure, which we, with our relatively small setup, already feel as an itching pinch.

So that's as much as I want to say and can say on the equity book of the bank. I hope that's okay for you, Mr. Lukesch.

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Walter Allwicher, Deutsche Pfandbriefbank AG - Head of Communications [17]

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Next in line is Benjamin Goy and then Johannes Thormann.

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Benjamin Goy, Deutsche Bank AG, Research Division - Research Analyst [18]

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Yes. Two questions, please, from my side. First coming back on the RWA inflation in real estate finance. So it went up EUR 900 million, but your book underlying is stable. So either, as Nicholas mentioned, is much higher risk density, i.e. almost 1/3 higher of competitive maturing book or some other impact maybe from the NPLs. So maybe you can help with some details?

And then your capital position went down due to higher deductions. Maybe you can quantify it? Are we speaking about EUR 50 million? Or is it a triple-digit number? That will be helpful.

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Andreas Arndt, Deutsche Pfandbriefbank AG - Chairman of Management Board, CEO & CFO [19]

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Okay. Goy, thank you very much. I mean RWA inflation, the easiest way to follow up on that is if you take end of 2018 figures against end of September 2019 figures. And what we see is sort of net increase in portfolio of roughly EUR 1 billion between those 2 points in time. And the -- now I have to refer to my figures here. The increase in risk-weighted assets along that line with EUR 1 billion nominal comes basically from returning to gross figures, EUR 2 billion gross increase in real estate finance and EUR 1 billion reduction in real estate funds. So business which goes in, and business which goes out gives you a net figure of EUR 1 billion. That's one point.

The other, which did sort of march against that were revaluations of collateral, which we do on a regular basis when it comes to annual reviews of our transactions. Here, in many cases, LGDs and PDs were to be upgraded and risk-weighted assets were to be reduced. There was a technical point in that, that was a completion of collateral input from new business, which also did set loose some of the risk-weighted asset requirements. And we had a counterbalancing effect from market risk evaluations.

So if you look at end of 2018 to end of September '19, it's a normal stable development, with minus EUR 250 million risk-weighted assets. And those are the factors which I tried to describe underneath. So by tendency, maybe that goes back to your question, by tendency, as the risk-weighted assets which we release come off at a lower risk weight than the risk weights for the business, which we add onto our book, but that is in the nature of things because the remaining maturity of the remaining book or the book which rolls off naturally is much shorter than the maturity of the book, which we take on as new business, and that surely always reflects into higher risk weights as we go forward. So that's on the RWA inflation.

On the capital deduction, it's more to the first point, where there's still a small tiny change. There are no large deductions to be mentioned. So I think we have Mr. Thormann.

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Walter Allwicher, Deutsche Pfandbriefbank AG - Head of Communications [20]

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We have Johannes Thormann, but I think Johannes found the 9 star button again and canceled his question. So unless we have an issue with our system here, there is no further question registered. However, in the meantime, Philipp Häßler has registered. (Operator Instructions)

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Philipp Häßler, Pareto Securities, Research Division - Analyst [21]

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Philipp Häßler from Pareto. Most of my questions have been answered, only 1 is left. Maybe you could explain a little bit the new business development in the U.S. in Q3. The proportion was lower than in the first 2 quarters. Was it just that you were cautious? Or were your new business margins not what you expected? Or was the demand not so strong? Maybe you could provide some more details.

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Andreas Arndt, Deutsche Pfandbriefbank AG - Chairman of Management Board, CEO & CFO [22]

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I think that's -- the business which we book comes in a bulky manner. And there are always some more arbitrary changes. You have quarters where there's more and other quarters where there's less and you push more business into the next quarter. So I wouldn't make any systematic -- or wouldn't take any systematic deductions from that. We are highly satisfied with the business which we get from the U.S. It's a good pipeline. It's good and interesting business. It's a high-quality business. Margins on the U.S. side, I must say, with all the positive connotation which I gave for the margin as a whole, the U.S. margins are still below our expectations. But that has something to do with the selection of the business where we stay very much middle of the road, so to speak. So middle of Manhattan, which is the bulk of the business, which we contract there. So there's no reason to have specific deductions from that figure.

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Walter Allwicher, Deutsche Pfandbriefbank AG - Head of Communications [23]

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At this point in time, we have no further questions registered. And I think we should take this as we have answered your questions. So in that sense, thanks again for participating in our call. We appreciate your interest in PBB, and we look forward to meeting you for the annual results, and of course, also look forward to speaking to you in the meantime. Thanks. Take care. Bye-bye.

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

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Thank you. Bye-bye.