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Edited Transcript of PBB.DE earnings conference call or presentation 13-May-20 9:00am GMT

Q1 2020 Deutsche Pfandbriefbank AG Earnings Call

Unterschleisseim May 13, 2020 (Thomson StreetEvents) -- Edited Transcript of Deutsche Pfandbriefbank AG earnings conference call or presentation Wednesday, May 13, 2020 at 9:00:00am GMT

TEXT version of Transcript

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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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* Dieter Hein

Fairesearch GmbH & Co KG - Partner

* Johannes Thormann

HSBC, Research Division - Global Head of Exchanges and Analyst

* Tobias Lukesch

Kepler Cheuvreux, Research Division - Equity Research Analyst

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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 the Q1 2020 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 to our Q1 results call in what is probably rightly considered to be difficult time. Here with me is Andreas Arndt, and Andreas will lead you through the presentation, which I suppose you all have available in front of you. And he will take your questions afterwards.

Andreas, please go ahead.

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

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Yes. Good morning, and welcome to our analyst call regarding PBB's first quarter 2020 results. Thank you for dialing in. I hope you and your families are well and healthy. And you, at least most of you, will have arranged yourselves for working from home.

As mentioned, we do have clearly unprecedented times, which also, unfortunately, does affect, to some extent, the PBB. As already communicated in the beginning of May, we came in for the first quarter with a PBT of EUR 2 million, including EUR 45 million effects from COVID-19, or to put it the other way around, without these effects, we would have shown a good result of EUR 47 million, which is more or less stable year-over-year.

The effects from the COVID-19 pandemic relate to changing economic and sector-specific forecast assumptions reflected in risk provisions and credit spread movements reflected in fair value measurements, but so far, no additional defaults. Even though we might currently see some relief measures for public life and for the economy in some of the countries, the effect -- the actual effects from corona disease and from lockdown over several weeks will become visible, at least in our business, only with some delay, i.e., the next quarters still have to show what the effects are and what has really and how much has really eaten into the economy.

On the background of such uncertainties about the extent of further developments, with regard to relief measures, economic recovery for the lockdowns, we have decided to withdraw our guidance for 2020. So with that in mind, what are the specific topics, which are COVID-19 pandemic-related, which we would like to share with you and which we -- which have become sort of our daily business? And I refer to Pages 4 and 5 of the presentation. And the first point, of course, which I'll refer to is staff and operations. The good thing is we are fully operational. Approximately 90% of the staff is working from home. That includes all critical functions such as origination, bank operation, risk management and treasury. The situation is absolutely stable. It's supported by state-of-the-art IT landscape. It is, if you want to put it this way, the stress test for the -- for last year's implementation of a new IT system, new IT environment. And the new IT infrastructure has passed the test, I think, admirably.

We did, of course, needless to say, implement another additional corona prevention measures at a very early stage, such as social distancing, hygiene measures and so on, with the result that we have almost no affections.

Now the second point is what does the situation require in terms of risk focus? And what is, of course, organizational in terms of setting up the necessary infrastructure, the organization? We did set up immediately Pandemic Crisis Management Team, which is meeting -- still meeting several times a week to monitor the situation. We looked at the risk profile and the requirements, risk requirements for new business and did tighten our standards above and beyond the already conservative standards. And we put to work, what we call the corona task force, breaking down different topics into 8 working groups which comprise, of course, the credit risk management organization, origination/underwriting, property analysis and so on. They focus on specific topics, which have surfaced over the last couple of weeks and months and make sure -- and take care that overarching issues have been fully made transparent and that incoming client requests for payment delays and things like that will be properly dealt with. That's not a replacement of workout or whatever, that's simply our additional capacity and additional competence in dire times.

Now the third point, which in a way should -- always come first, comes third in line is client business and commercial real estate markets. I think it's also important to reiterate and to make clear here that PBB remains a reliable financing partner in difficult times. So we've been working down the existing pipeline and pending deals, which have been followed up and executed where possible and were in line with the PBB's risk focus.

But we also have to acknowledge that since the onset of the lockdown, there is a significantly smaller number of new transactions as investors do hold back. That is not that much -- when we come back to that, not that much visible in the first quarter, which has been profiting immensely from our -- sort of in the -- from the 2019 situation and deals which were transferred into 2020. But we see it now that in April, the number of transaction actually goes down significantly.

The other point is different commercial real estate areas are definitely affected. We do see, in some places, significant reduction of net rental income or net operating income to various degrees, and you will not be surprised to see hotel and retail to be amongst those which are most affected and more affected than office and residential, of course. So that's the picture which will prolong itself into 2020, '21. And it's something which will also be influenced by the way how the economy is moving over the next weeks and months to come, whether it's more sort of V-shape or U-shape scenario in economic development.

As now -- and that's not very surprising, and that's apart from any sort of estimations, which we give on property prices. As of now, property prices are still largely intact. We have -- and we don't see any significant valuation movement so far. That's also owed to the fact that we see no forced sales and we would assume that visible adjustments are to be expected in the second half of 2020.

The interesting thing is, in a crisis, client relationship is reinvented. Reliably working together between client and the bank is something which is needed in the crisis on both sides. And that has a number of implications for the business. I'll come back to that. When it comes to extensions and prolongation business, that's certainly favorable. We make it the case that, a, the client relationship comes first. The risk assessment of the client relationship comes first, the preparedness of the -- on the ability of the bank is important in terms of capital, which we can put in risk-weighted assets and liquidity, which we can put behind such a transaction and then comes the consideration of pricing.

So we don't do deals in this situation. That's the net-net of what I want to say. We don't do deals in this situation because there's a very attractive pricing. There are deals out, which are very attractive in terms of pricing, but the other criteria, i.e., client relationship, risk and efficient use of capital comes first.

And having said that, it is even more so than before. There's focus on high-quality clients. It's the focus on -- focus, focus, focus on A1 properties in A1 or 1A locations, at improving margins, though. For low leverage lending, as you will see in the course of the presentation, our LTVs are further down against last year and the years before.

The fourth point of consideration in such situations is capital and liquidity, of course. I'll come back to that point. I just want to give the outlook on the main pillars at this point in time. We have always been driving very solid regulatory buffers, which amount to something like 6.5%, 6.8% by now against the, say, restated pro forma 16.3% SREP and against the 9.5% SREP ratio, which we have in place. That determines the bank's capacity to be able to provide loans and credit to customers and provide credit for the second, the benefit of customers and the overall economy.

But it's also at the same time, as you know, a buffer for P&L risk. And very sufficient buffer, I should say. And it provides sufficient headroom for potential RWA shifts going forward. But please keep in mind that the last major RWA shift, which we had was only a quarter ago due to a very strict and very complete recalibration of risk parameters with the intention to have more resilience over the cycle. And it's sort of fortunate foresightedness that we have already undergone this exercise to some extent.

The equivalent to capital is liquidity. And on the liquidity side, due to the fact -- due to a combination of factors being less new business expected; short tidal wave, so to speak, from 2019 in terms of prefunding and sufficient and very opulent prefunding in the first quarter. We have a liquidity situation, which I would call, robust. And which is of such nature that it extends the liquidity without going to market well into the second half 2020 and covers even internal stress test well beyond 6 months. So that's a good place to start from and structurally not much changed against what you know from 2019 figures.

The other point I would like to mention because I think it's important -- it's regulatory important because the transparency, which we have to give, it's required anyway. But also for your information, I think you should need to know, while we stand in using the alleviation measures which are being proposed by EBA, ECB, with the good help and support of the accounting profession. The overall line states avoiding cyclical overreaction and doing the necessary things in order to keep credit rolling credit to the economy. We do use a longer-term calibration for property prices assumption in 2020. But otherwise, and that's the key message we have abstained so far from using any other alleviations such as blocking stage migration, topside adjustments and others. I'll come back to that point.

The key message is also in how we treat things from an accounting point and a regulatory point of view. I think we stay more on the conservative side of the spectrum. As much and as far as we can give some view, I don't call it guidance or something else but have a view on what the economic development might be and how that sort of reflects on the calibration of risk cost. There's -- as much as we can say as of today, or as of March and April figures, we base our assumptions -- economic assumptions on the forecast so far on the forecast of the German Sachverständigenrat, the council of experts, and we assume a V-shaped development as probably most of the economists do these days, with the recovery beginning in Q3 and a rebound of markets in 2021. And we assume that property market value is expected to decline significantly in PBB's portfolio end of 2020. Or I should say, in the market, how much that is reflected in our portfolio remains to be seen. And it's a significant decline in markets with an average discount in -- of 20%, if we stick to our adverse scenario for 2020 with a further decline of some property classes in 2021 also implies that some of the property classes will go up in 2021 as well.

That's important -- those are important assumptions for how we steer the calibration of risk costs, stage 1 and stage 2. We use these estimates. We constantly monitor the sort of the up-to-dateness of our assumptions, and with the unsecured environment in which we live, I would say it's not saying too much that we will have this reassessment also by second quarter and possibly some readjustments to the risk costs going forward.

With all that, and that's the last point on that Page 5 is sort of the breakout of effects, which are related to the operative performance which we put at EUR 47 million and the COVID-19 effects, which are EUR 32 million gross on risk provisioning from stage 1 and stage 2, and EUR 13 million value adjustment or fair value measurement out as EUR 13 million as a total. Both together amounting to EUR 46 million related -- or EUR 45 million, sorry, related to COVID-19 measures. So that's sort of the cornerstones amongst which we move these days and also move in our discussion around the presentation.

Now with that, I would turn to Page 6 and would just go through the key or the cornerstones of our P&L with some more comments coming on the risk side and the value side at a later stage. As I said, the operating result, I think, is quite gratifying. PBT at EUR 2 million after EUR 48 million which we had, mostly and predominantly owed to COVID-19 pandemic effects. However, NII is slightly down in the year-over-year due to an average interest-bearing financing volume, which went down by EUR 400 million. So a small deviation and more so according to -- or as an effect of our good prefunding, which I had already mentioned, counterbalanced by the fact that the income from realizations has gone up by EUR 8 million.

The general admin and expense are slightly up due to higher cost for regulatory projects, but in line with plan, and EUR 30 million below last quarter. It's only, as I mentioned, EUR 4 million is provisions for stage 3 on the U.K. Shopping Center, which is already being provided for where we stepped up the provision and which, as such, had nothing to do with corona circumstances. As usual, we also book a bank levy for the -- in the first quarter for the entire year, which we estimated at EUR 20 million, so stable over last year.

So those are the cornerstones on financials. On new business, we reached EUR 1.7 billion, EUR 1.6 billion of that real estate finance. So that's where the focus lies, which is a solid level, which is in line with expectations. It's in line with the plan. And you may remember that we took down plans against 2019 for 2020 already to some degree. So that's perfectly in line with what we were looking forward to. It is gratifying that you see average gross margins going up to 170 basis points or rather a bit more than that. Which is 15 more than the 2019 levels, and it's about 30 basis points approximately above our plans, which is an important consideration to the question as how, on operative terms, we're moving along with NII projections through the entire year. I'll come back to that.

Our pipeline still -- and that's sort of -- a bit of surprise, I should say, still supports significant amount of very selective and high-quality new business. But as I've said, as of this stage, we observed lower investment activity in the market. The strategic real estate finance portfolio is slightly down, as mentioned. Public investment finance is stable and value portfolio is further down. Not significantly, but a little bit. I mentioned our prefunding activities and good liquidity situation. By end of March, we already met our first half '20 funding needs or funding requirements. This provides us with sufficient funding position well into second half 2020.

Capital ratios, as I mentioned, strengthened further, mostly due to the full retention of 2019 profits, which gives us an extra 70 basis points and bring the CET ratio to 16.3%. The withdrawal of the dividend proposal for 2019, as you have noted, followed the general recommendation of the ECB and the general movement of the market. We will reassess the situation in autumn, sometime in October when and if the impact of the corona crisis provides, say, a better or clearer picture of the overall situation.

Now whether we have more certainty at that point of time remains to be seen. It is clear that the lack of certainty or the uncertainty which surrounds every economic activity these days is the reason why we went to our guidance for 2020. In the present, the effects of COVID-19 are not reliably predictable. And the same applies here. We will give new guidance when things become more clear.

So to sum up on Page 6, we do show solid operating performance. The accounting and valuation effects from COVID-19 are significant, but so far, no related -- nothing related to any defaults. And the guidance is withdrawn until there's more clarity around the situation.

As I have touched, I think, on most of the figures, which you otherwise find on my favorite Chart #7, I would leave that to your digestion for now and would turn directly to Page 9 on markets. Now that's the story which you can make long or short. We decided for something in between, giving a short market overview on Page 9 and some detailed insights on Page 10, followed by some deliberations on economic outlook and property markets.

To start with one general observation, and you would not believe it, but the first quarter 2020 was the best first quarter in a row of last years, both in the United States and the U.S. Even after the corona setting, there is still a significant overflow of pending transactions from the last month to be executed and to be closed. That is somewhat -- that's a very practical site remark that's somewhat hampered by some limitations for the values in the second half of March and going onto in April and the months to come, because there are certain limitations to site visits, and there are certain limitations to inside viewings. They being alleviated by outside views and inside videos, plus CPs, conditions present in contracts that assessments being made subject to later diligence. So in practical terms, it does not turn out to be a major obstacle.

The second point I want to make is already made as no pricing adjustments so far because we have not seen for sales and investors sitting tight on their hands, waiting for better prices from cheaper opportunities to come their way. But what we do see already is in some parts of the business, significant rent reductions, especially in retail shopping centers, factory outlets, hotels, restaurants and where you have a lot of SME tenants. That will, of course, affect future valuations, unless the economy returns to more normal picture quite soon.

In that context, as not having mentioned it so far, office still looks very stable and good. It depends very much on the tenants and on, of course, on the location. And on the structure of tenants where there is more co-working type of tenants, the large ones still pay, but the second and the third quarter are also litmus tested in that expense -- in that respect. In general, I would say, the less co-working you see on an office investment, the better.

So I'm jumping a little bit to Page 10 and on hotels. In principle, what the situation reviews is that there is a substantial oversupply in hotels -- in hotel capacity in many locations, especially in relocations. We expect further or significant downturn in property prices on that side. We do believe large chain -- well-managed chains will survive, but they themselves will do rigorous segmentation, elimination of the sites or the locations they want to keep on to in future. And business hotels will be back -- much earlier back than leisure hotels and leisure parks.

We do have a limited exposure to that. It's 5% of the total with an LTV of 53%. And I think that's the first time that we showed these figures, and I see an interest coverage ratio of more than 300 across the entire portfolio. And the key regions we deal with is Germany and the U.K. And as I said, it's focused on business hotels.

Now on retail, there's not much new, which I can review. What we can say is that corona and online, say, work as an accelerator on structural change, that is very clearly visible. There's an overall price pressure from tenants because they were locked down because they make use of the situation because they partially are in default, especially situation, which is very severe for the U.K. side of the business. As you know, we have reported that.

Discounters and warehouse centers are still considered to be relatively safe. Now with 16% share of the total portfolio, we have already reduced retail exposure significantly over the last 3 years, i.e., by more than 30% since2016. We now look at the portfolio of EUR 4.8 billion, with an average LTV of 52% and an average ISC of more than 300 -- yes, 300%. Here, again, I think we have a well-diversified regional setup of the portfolio with focus in Germany, 29%; UK, 24%; and CEE, 18%, close to 20%.

There's sort of one special branch (inaudible) development loans. (inaudible) say, although they've been typically considered as to be on the high-risk side, in our case, they're doing well. The specific risks, which we deal with or the development investors do deal with is, a, the construction risk or the completion risk. Since 80% of our engagements are in Germany, construction sites are in full swing. We have no delays, which we know. So we assume that there will be proper and in-time delivery of all the projects which we have funded.

The other concern is long-stop dates. So if you have delays in construction and in delivery, you may trigger the clients' right to withdraw. Or you may sort of give course to the client to renegotiate terms of the delivery that we do not see as a real danger presently, but that's something to monitor and to observe carefully.

Now clients, and that can be tenants or can be buyers. There might be some bowing out due to illiquidity or insolvency, not something we have seen recently. The interesting thing is what happens when they come to the market now. There, I can say, for our portfolio, most of what comes to market now is more -- is fully sold or let. And if it -- if we would assume that comes to market in 1 or 2 years' time, I would believe there's a good chance to fill in with new business if the investors are flexible on pricing. We see more risk on the established builders of buildings, which will need to be evacuated and need to be reinvested or refurbished for re-let and the risk actually, in our view, will be shifting from the present buildings to the -- sorry, from the developments to the present buildings.

What is not on this list is logistics. It's fairly short to answer. It remains a well-sought-after asset class with still some transactions going around. I think structurally and in the economic terms, I think the last weeks have shown the importance of online sales. The importance of online -- sorry, the importance of seamless delivery. And the importance of good logistics.

So on locations, some in principle remarks, I think the large centers in Germany are mainly and mostly okay for Munich, Hamburg, Frankfurt, Berlin. If you look beyond Germany, certainly in New York, the most affected place, we do look at that specifically, not because we believe it's rather more risky than other places. Besides the very special situation, which we like to state that presently there from a corona's perspective, but simply because in the markets where we do business since a relatively short time. We started, as you remember, second half of '16. We do have focus very much on office and residential, which both together covers almost 100%. And we are active only in the large locations. We've discussed this many times. The portfolio presently of EUR 2.7 billion with an average LTV of 56%. We have -- for those investments, which we have there, we have no difficulties to report presently.

So with that, I think you have a pretty fulsome picture of where we look at and how we look at certain asset classes in certain regions. If we sort of step back a little bit and look at economy as a whole. The figures, which you find on Page 11 are sort of weighted figures according to our portfolio, both for the IMF as well as for the German Research Institute as well as for the 2 scenarios, which we have set up.

The general message is here. Over this cycle, what we assume are -- and what the German Research Institute assume, is very much alike. We are probably closer to the IMF when we look at our adverse scenario. And ultimately, what we have employed in sort of feeding our models, our risk models is somewhere a mixture between our base and adverse scenario, that's the second message. And the third message is, this is something which we did 4 weeks ago. Times have changed, we probably have to look at that again in the light of second quarter developments.

In principle -- but that's sort of the short sum up of it, in principle, we do rely on a V-shaped assumption. That's important for -- again, for the modeling of our risk models, a V-shaped assumption, with a rebound in second half and in 2021. And that's the same assumption, which also underlines the Page 12 picture, where you see sort of a range of possibilities between base and adverse, between regions and property types of different ranges of market value development.

The base assumption would be a general discount on -- across the board, across the entire portfolio of 10% in market value. If we're leaning more towards the adverse side, it would be 20% discount. So market value either 90% or 80% depending on assumptions. And then if you go into 2021, again, depending on scenario, regions and property types, somewhere in the range between 70% and 90%. So here the clear signal is would we assume that we sort of have a full rebound into property price levels of 2019 already beginning or in the course of 2021. Clearly, no. There's a good chance that sort of the full recovery is being established or accomplished in 2020, 2023.

Those are the values of which I don't give sort of a detailed breakout here, but those are the ranges which we use and which we employ in our middle modeling. That's the one thing. And the other thing is we have compared that and benchmarked this very closely against the last crisis, 10 years ago, and looked at the property price developments, netted the necessary achievements and feel sufficiently conservative in our assumptions of how we model risk going forward.

And the last point to that effect is, when you ask how we model that on the risk side, I would say, and that's not really surprising for real estate bank. That in our models, the sort of -- the intrinsic weight, which different factors are being portioned to, the intrinsic weight, which relies on property prices, is significant.

Now with that, I would turn to Page 14 -- or rather would probably turn to Page 15. Yes. I think 14, you can read for yourself. And I'll start with the details straight away. As I mentioned, the -- on the NII, that's Page 15. On the NII portfolio, the various components, which affect the figure for 2020 first quarter. The first one, to a lesser degree, is the strategic REF portfolio is down by EUR 400 million as maturities exceed new business. The more important thing in terms of doing the NII calculation is the liabilities prefunding, which contributes on the negative side, which also weighs against the run rate of the last quarters, is the accelerating effect from -- negative impact from equity book and liquidity book and the bonus on cash, which has also become dearer. What has been helping is the flows, which were stable. And what is helping going forward is the client gross margin on portfolio and as well also on new business coming from 2019 and in 2020 first quarter, as I said, 170 basis points.

So what we would expect going forward is stabilization of the portfolio development -- of the level of portfolio development with new business rolling in at higher margins and, thereby, stabilizing NII going forward for the next quarters.

A word about realizations on the same page. Half of that is -- roughly half of that is a settlement gained from a premature closing of derivatives' transaction. And the other one comes from prepayments. That's a figure where I can safely say, we would expect not to see that much in the coming quarters, as we would assume that prepayments reduce significantly.

Now the other part, which is affected from corona is the fair value. In a way, rather surprising so. And therefore, we have given a bit more information on that position, which otherwise, we have not commented much because the major impact in the past was from structural effects such as the negative pull-to-par, which here, in this case, notes with minus EUR 3 million only.

The large chunk is credit-driven with EUR 13 million and approximately EUR 10 million out of that related to specific effects -- spread movements on German subseverance. There's a -- 2 lender -- 2 federal states, which we have on our books, which do not suffice the CCC criteria which are sort of leftover from earlier times. In terms of credit quality, no doubt. But in terms of susceptibility to credit spreads, quite some leverage. Now we would expect those values to come back over time as a sort of positive pull-to-par if nothing else is changing. So we have no worries. But presently, it sort of impacts our P&L.

The Italy part, that's the 2 -- minus EUR 2 million of severance, is rather minor. And supranational organization is also a smaller part, and the rest goes with XVAs. So it's explicable. It is somewhat a little bit surprising, but also an element which we would expect to come back.

Now on risk provisioning, and that's the other item. That's Page 17. I think what is important in this context is that the risk provisioning, which we show is predominantly related to model-based additions to stage 1 and 2. And that's what you see on the top left side of the chart, stage 1 and stage 2, EUR 17 million and EUR 13 million. So that's a net figure, EUR 30 million gross figure related to corona is EUR 32 million. That, together with more than EUR 30 million, which we worked on in our Q4 results for 2019, makes more than EUR 60 million additions to general loan loss provisions or loan loss reserve within 2 quarters. And that, I think, is significant signal for, say, our conservative approach and for the resilience of our portfolio. The -- what I'd say results and an increase of stock in loss allowances to EUR 169 million, which now makes up for 62 basis points of the real estate finance portfolio and is split up in approximately EUR 111 million stage 1 and 2 related and EUR 58 million stage 3 with stage 3 being stable over time. And the stage 1 and 2, meaning the general loan loss provisions having increased significantly, as I just mentioned, over the last 2 quarters.

The chart on the top -- on the bottom right-hand side should give you some indication of where we blotted out the names of the other dots -- but you may do your own calculations, we'll give you a little bit of sort of positioning of the bank towards peers and other banks. It's a broad range of banks, I must admit. What it says basically is that we are more or less mainstream in terms of risk provisioning in terms of basis points. We do calculate that on a quarter-by-quarter figure, not on an annualized figure, to make that clear and as a figure against the total risk provisioning of last year, which in our case was 69% against last year's risk figure -- risk cost figure.

The really interesting thing is something which you cannot really see from this chart, but if you read it in the context of the portfolio of others, then you will see that many banks have unsecured exposures such as consumer finance, corporate loans, leveraged loans and things like that. And we sort of structurally have our risk cost calibrated against completely and fully secured portfolio. Structurally, that makes a difference and shows, I think, the degree of conservatism, which we applied in this case.

Now Page 18 gives you an overview of accounting interpretations of the European regulators in the light of COVID-19. I would not go through that in detail. It's more for your reading. The general message is, except for the long-term perspective applied to property prices for the 2020 values, we have the other relief measures being offered by ECB, EBA. We basically have not applied. And if there are questions later on, I'll come back to that point, but I think that's the gist of it.

What is not on this chart is how capital release are being applied, but I will say a few words about that when we come to capital. And what is not on this chart, and we can leave it perhaps for later discussion, is how we deal with private moratorium, where we not deal with, at all, presently, which is the short answer to a possible question on that side.

I think the overarching message, which I mean to leave with you is that, in principle, we stick to the standards of IFRS 9. And we do not see necessity to apply relief measures at this point of time, except for this one question, which I mentioned.

Cost is relatively easy. It's stable. Cost-to-income ratio is slightly up because of the revenue side of it. It's still below 50%. You see that on personnel costs, we are still stable, which given all the changes which we had is a rather remarkable result. What is up is not personal cost by another EUR 2 million, which is related to still ongoing -- significant ongoing regulatory efforts, which we have, which would see us busy for the rest of the year for sure. So -- but otherwise, I think costs are well under control, and cost-to-income ratio below 50% is good.

Portfolio profile. And I refer to Page 21 now. Let's see. Yes. I think most of the points I've mentioned, the interesting things are, first of all, the average LTV on new business is further down at 56%. If you think 3 or 4 years back, that figure was between 61%, 62% on 63%. So also, in terms of new business and how we allocate LTVs to it, we see ourselves moving to the more conservative side. Consistently so, the gross interest margin, I mentioned, is 170 basis points.

What is also interesting is the development of the business mix in terms of new business and portfolio, you will see 58% business done in Germany in the first quarter against 48% portfolio. That is not surprising, and that will be a pattern which you will continue to see over the next quarters to come, not because we don't like the other markets. But partially, it's always a symptom of crisis that you feel more secure at home, to put it this way, but it's also a reflection of the fact that in France, due to the -- actually ongoing lockup, there is very little transactions going around there. There's little appetite on our side to do U.K. business presently. And that leaves basically United States and Germany. And fortunately, in both countries, we do see good deals, and we look after them, and we'll pursue them. And sort of how that translates into portfolio, you can work out for yourself.

On property types, again, office is the mainstay of the property types with some investments in residential logistics. Now hotel and retail sort of make -- by its magnitude, may come as a surprise. It is a mixture of, say, pipeline transactions, which we had; extensions, which we willingly and voluntarily did consent to; and 1 or 2 new businesses, which risk-wise, absolute -- and pricing-wise make absolutely sense. That's not a deviation from our conservative and cautious approach, but it's sort of the composition of those 3 elements, determining factors, which I just mentioned. So -- and that translates into the portfolio, as you see on the bottom right-hand side.

In that context, I have inserted a chart on Page 22, to make 1 or 2 things more clear. One is, why do we assume that in this critical situation, we would sort of come out throughout 2020 and given what we know at this point in time in a, more or less, flattish, stable development on the portfolio on the strategic portfolio of commercial real estate with around EUR 27 billion throughout the year. Now we have analyzed repayments and prepayments and prepayment behavior in times of crisis. And we analyzed the same thing for new business, new commitments, extension syndication behavior and things like that. And now the regular repayments, we still expect to be relatively stable.

The prepayments, which we have seen to the tune of EUR 4 billion last year, we would expect to be significantly less for 2020, we would see a significant increase in extensions and prolongations. And we would, of course, see in terms of few new business commitments, a figure, which is less than we have projected for 2020.

If you put that all together, then the sort of relief on the prepayment side and the extension of prolongation side will well compensate for any less new business, which we write, which at the end of the day, without giving exact figures to it, would result in a stable development of our portfolio. That's, as I said at the beginning, I think that's an important cornerstone to the operative development of the bank going forward through 2020.

Coming on top, and that's the second remark I want to make on this Slide 2020 (sic) [22] is that a higher-margin with a low share of development loans, a higher share of investment loans will make itself throughout the year in terms of increasing gradually the overall business margin, which we have on our book will be helpful for NII. And the third one is more as a sort of assuring ourselves of what we do and assuring yourself of what we do in terms of how do you originate business in such times. And those are the principles by which we go.

We have always looked at prime A locations, and there is a sort of even more A-pronounced location type, which we look at. So very selective on locations, very selective on sponsors. Taking down leverage even further, as you can see, we look at stable cash flows; properties being rented out for 10 years, 15 years, with stable and good tenant quality; solid covenant structures that is especially interesting for the business in the United States where you typically have notice in covenants on LTVs during the lifetime of your loan. That's something which gradually comes back. So that's also good.

We -- I mean for all that I've just said for the first quarter, but going forward, no hotels and no shopping centers, retail -- other types of retail-only and highly selective cases. We're presently working on one transaction in an excellent location, excellent sponsor, but has a sort of 50% retail to it. We're probably inclined to do that. But otherwise, that's very exceptional. But otherwise, we abstained from that property class. If we do that, we will focus on neighborhood shopping or high-street retail.

Development loans, probably no. And always, if there should be exceptions, subject to strong risk-mitigating factors, i.e., high levels of pre-letting and upfront equity, long-stop dates and lease contracts and so on. And as I said, emphasis is on extensions. That has basically 3 advantages: A, we know the engagement and the sponsor; B, it is less work for us; and C, probably -- not only probably, it comes with higher margins.

So with that, you know what we do. Page 23 is a shorter review, which I, more or less, leave to you with one remark on the value portfolio. The negative result, which you see there, is triggered by the fair value addition, which comes through the value portfolio allocation of the lender of Schuldschein, which I described earlier on. So it's rightfully allocated to the value portfolio. Otherwise, very much in line with what you know.

24 -- 25, let's have a look at the portfolio. So to corroborate what I just said, on the portfolio, further downward trend on the LTV as a whole. A relatively narrow spread in terms of regional distribution and in terms of asset class distribution. It's also not quite new. And on the internal ratings, no changes so far, which is not a surprise because we had re-ratings of our portfolio in December 2019. That's the 82%, which you see.

And as we haven't seen any further defaults to occur and did not enter into re-ratings so far, the expected loss going through -- or going into cycle is very stable, which is also owed to the more conservative calibration of risk parameters, which we applied in December last year.

So with that, also, not much new to tell on Page 26 with the NPL ratios and NPL volumes. The slight reduction on the NPL volume from EUR 495 million to EUR 445 million. That's EUR 17 million out of FX movements of British pound and EUR 30 million decrease related to partial repayment of the ECA-guaranteed public investment finance loan across financing. That's a restructured loan, but it's still in probation period. Therefore, it still shows up, but that's been reduced.

Now funding. As I said, we are benefiting from strong activities in 2019 and from good activities at the beginning of the year. We already met our Q1 and second half -- sorry, second quarter funding targets by mid-February, raising altogether EUR 1.9 billion. That was EUR 1.3 billion for Pfandbrief and EUR 0.7 billion for unsecured. An unsecured means preferred as a small residual, which is nonperferred Schuldschein, but 95% is on the preferred side.

With regards to funding spreads, we benefited from the good timing. This is -- in this time, really good timing of funding activities. And spreads went down on Pfandbrief and unsecured, as you see on this list 28 -- on the Slide 28, to 13 on mortgages, 5 on public Pfandbriefe and 55 on unsecured.

The pbb direkt volume was slightly down, now standing at around EUR 2.7 billion. As we always stated in the past, pbb direkt provides a scalable funding source in addition to capital markets funding and has been kept at that level. We indeed, and in fact, work on new money campaign sort of to see how much replacement we may want to have on that side.

Now the chart on Page 29 is, I think, well known to you. It shows the well-known development over the last couple of weeks, where we have seen peaks, which we haven't seen for a very long time, level to come down back to 140. That is something which is still not very attractive in terms of going to market. And as I said, there is no need to go-to-market at this point in time. So we will see and wait and see what the development brings.

Page 30 should show sort of prospectively the determinants of funding for 2020. The first important thing to mention is while other banks might be much more severely being affected by wholesale drawings on the credit lines, that is something which, by business model, is not a concern which we have. So we don't have corporate drawing our liquidity lines. When we have drawing on commitments, those are clearly defined drawings, for instance, investment loans, which have been dispersed now or that's development lines where clear conditions have to be met before you can draw.

So that's the minor point that makes liquidity forecast much more stable and much more reliable.

Prefunding, I mentioned, we have a significant hangover from last year. And we have reduced new business volume expectations for the rest of the year, and that lowers significantly the need to go to market. In all these cases, LCR remains comfortably above 150%, and our liquidity reserve is sufficient to cover even internal stress test well beyond 6 months. So we basically can sit on our hands.

What gives more comfort is that there are structurally attractive substitutes available. Now the Pfandbriefe itself is, in a way, a no-brainer. It's a resilient funding source by going directly to market. But also by extending ECB's funding program, we have the ability to deliver on Pfandbriefe to ECB to draw on lines there, which, by the way, makes it even cheaper.

Retail deposits, I just mentioned. It's established, it's scalable, and we've set out a new fresh money campaign to reactivate that. Clearly, retail in such a situation becomes more attractive if you measure that against the spreads, which we observed on senior unsecured.

TLTRO still provides attractive alternative and a flexible source of funding. We will look into the newly designed TLTRO under the new program. When it comes to it, margin-wise, it's even more attractive than before. So that's something which we take into consideration. And what we're already using is the use funding by ECB at attractive rates.

What I also want to say, it's not only the availability of alternative funding sources, which we have. It is also the stability of Pfandbriefe, where you can go-to-market sort of any time at moderate prices. And the third point is with adjusting the funding mix in these times and making use of opportunities, we can lower cost or we can [as comp] or we can balance cost increases, which we see on one hand against advantages, which we see on the other. So that's the other message on funding cost for the entire year '22. We probably would see a more stable situation than the development of senior unsecured spreads may suggest.

Ratings on Page 31 are being unchanged. We got a reconfirmation from S&P on the 23rd of April. And it's part of sort of a wholesome review of German -- sector review of German banks, where outlook and ratings have been confirmed. The negative outlook, which you know, which we carry around since some time, is attributable to the Germany BICRA score rating for us in total. In its constituting parts of the rating, nothing has changed. And so it's Moody's PBB Pfandbriefe's ratings, which are unchanged since long. Currently, there is no impact from COVID-19 on the OC requirements. Some small increase in -- which we saw in the first quarter was related to some technical effects and not related to corona.

So almost last chapter is capital. As I said, capital ratio stands now at 16.3%, up from 15.2% reported at year-end or -- yes, 14 -- 15 -- sorry, 15.2% reported at year-end figures. RWAs are slightly down by EUR 400 million due to technical effects, regular reviews, construction completions and so on. And the second point I mentioned is the full retention of 2019 profit due to the withdrawal of dividend proposal, which will be reconsidered or revisited in autumn in October once we have more clarity around the overall economic development.

As I mentioned, the ECB temporarily lowered capital requirements for CET1, which gives us a relief of 1.09% and has suspended for the time being, the countercyclical buffer of 45. If you take those figures, start with 16.3% CET1 ratio and measure that against SREP requirement of 9.95%. You arrive at a buffer of 9 -- sorry, of 6.35%. If you add the 1.09% SREP relief being granted now back to that figure and add back the countercyclical figure -- countercyclical buffer you end up with a buffer of 7.89%, so almost 8%. 8% buffer on a capital ratio of 16.3%. That's, I think, something which at least makes me sleep well and sound. So I think I can leave it at that as far as the capital is concerned.

That brings me to the end of my presentation. Normally, I would have set to the outlook or the forecast on the rest -- forecast for the rest of the year. I have to be a little bit more cautious on that. What we want to say -- what I want to say is the following: The -- first of all, I think the operating performance has been impacted, as we have seen and visited by COVID-19 pandemic. The underlying performance is stable and sound. Risk provisioning remains to model base provisions stage 1 and 2. And the fair value measurement is something which we also see coming back at some point in time.

As I say -- as I've said, guidance 2020 has been withdrawn in view of the significant macroeconomic challenges. In particular, on the risk side and the valuation side. For the time being, V-shaped economic development assumed for '20 and '21, it's the sort of guiding light for economic forecast in our case. If and when negative tendencies become more pronounced further risk provisions will be considered. We have -- to repeat what I said at the beginning, we have taken all relevant organizational and risk-related measures to cope with the impacts, and it's working splendidly. I must say, the dedication, motivation and operational stability of our colleagues is fantastic.

New business is still important to us. It's very important to us. It's expected to be significantly below initial plan. But as I tried to explain, the culmination of loan repayments, high extensions and very selective new business is expected to safeguard the stable portfolio development.

The overall operative performance, I hope I could make clear, is expected to be reasonably resilient. And what is also -- which comes a little bit sort of short in terms of attention, but which is of utmost importance to us, PBB continues to work on cost efficiency and digitalization. We have so far no intention to withdraw or to treat back on investments in digitalization and new technologies, we will continue that.

So the crisis is severe, but PBB, with its constituent business model elements, I think, is well positioned, especially for such a situation. And when I say that, I do not only mean -- but also mean the capital and the liquidity and the operative performance in the cost-to-income ratio. What I mean to say, what I want to bring out is, I think we are uniquely positioned in our commercial real estate markets. Commercial real estate or real estate as a whole -- commercial real estate amongst that will remain major asset class through the cycle and after the cycle.

We still see excess in investment -- on the investment side, looking for investment opportunities. And we still see, and we'll continue to see in the long run, low interest. And those 2 effects structurally on the investment side and, interest-wise, will continue to support our business. In that -- to be in that situation, to be in the crisis situation, a consequent and rigorous senior lender with low LTV is exactly the position where you want to be, where we want to be benefiting from low LTV, benefiting from the fact that the risk always comes after senior lender and sits with the equity and in a situation where we do exactly see margins going up. I think it's something which to look beyond the day and the week is something which fills me with comfort in terms of how we place this business and how we steer this business going forward.

So that's it from my side. Thank you very much for being patient and listening in and happy to take questions on your side.

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Questions and Answers

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Operator [1]

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Thank, Andreas. (Operator Instructions) First question comes from Johannes Thormann from HSBC.

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Johannes Thormann, HSBC, Research Division - Global Head of Exchanges and Analyst [2]

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Just 2 questions left from my side. First of all, I still struggle to understand the logic behind your extremely bearish view on hotels, but doing 15% of your new business in Q1 in hotels and then having just a 5% usual portfolio share. This is -- wasn't there an exit option? Why did you do it? Or what is different to the hotels compared to those areas you're bearish on?

And secondly, just to understand how much from your trading loss in Q1? Has there been any reversals in April so far? Or is it still all the credit effects or negatives?

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

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I'll start with the easier one, which is what you call the trading loss, and which is not really a trading loss, but it's a valuation loss on the fair value, which we have on our books since long. It is actually quite attractive investment because that's -- even though it's been swapped on the interest side, still provides a significant carry to the bank. It's one of these sort of old leftovers at high margins, and so we like it.

The fact that this is being valued at fair value is due to the violation of the so-called CCC criteria. And therefore, we have to treat it mark-to-market. Not because of trading reasons, but because of that. With the introduction of IFRS 9, we had to classify all exposure, and that is a small part which fell under the fair value piece.

Now it is very strange because it is 1 of the 2 German lenders, which I would consider to be on the stronger side that you see them part of -- being part of the overall spread development, which you would more expect it to be proficient in the southern countries or whatever. But the spread developments, especially in second half of March, was so strong that even German lender did move in terms of spread, not much, but they did move significantly. And we had to take precautions and we had to take reserves against that.

Now would I expect that to come back? If nothing else moves and nothing else comes, we would see that coming back through regular re-ratings and revaluations. And then you have a positive pull-to-par, which comes back to the P&L of the bank. So I'm not worried about that.

Now rightfully, you asked about hotels and our bearish attitude and the fact that we do -- still do transactions there. Now first of all, we focus and we concentrate on first-class and business hotels only. And we have done that before. We have done that also in the first quarter. The explanation partially is extension.

The explanation partially is one deal, which was, more or less, committed, which we couldn't pull back. And the explanation is one other deal where we jointly looked at and said, be it crisis or not, that's a unique opportunity for the sponsor. And as there is a recourse also attached to that engagement to the sponsor, that's a special situation where we do not rely only on the property as such, but on the sponsor in a very particular and a very specific way, which did allow us to say yes to such a venture. Meaning is we don't set aside commercial sense even in such times.

I think it shows the ability and the degree of flexibility, which we have, where others say, no, never ever hotels. And there still will be opportunities in the market where you can do this business, and we will look at them.

That does not contradict the fact that we say, in principle, we don't do hotels. And I'm sure, going forward, for the rest of the year, you will not see a new business share of hotels or business hotels of 15% anymore.

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Operator [4]

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Next in line is (inaudible) from Deutsche Bank. And after, we have questions registered from Tobias Lukesch and Dieter Hein.

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Unidentified Analyst, [5]

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So I have 2 questions, if I may. One on RWA and the other one on your property value assumption. And the first question is your RWA deflation of 3% is disproportionally to your financial volume. And the reason you mentioned in your press release is due to the reclassification and construction completion. Could you please give us some more color on it regarding what kind of change in parameters have you taken? And probably a little bit more details on the construction project. And how much of it is nonperforming loans?

And second question to the property value assumption is that you mentioned that PBB use longer-term calibration for property price assumption instead of a single period. Could you please help me to understand here what's the difference that they make here in terms of P&L impact and risk provision treatment?

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Andreas Arndt, Deutsche Pfandbriefbank AG - Chairman of Management Board, CEO & CFO [6]

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Okay. No, happy to take the question. On RWA, I mean, first of all, it's -- I think it's a very small movement, which we look at, which comes from various technical effects. There is sort of -- as you may want to get no underlying deterioration of risk, which sort of shows through. When we talk, I think the wording -- what was the page? When we talk about construction completion, that's -- the point is we can take collateral into consideration only after the property has changed hands, all the documentation is done or the construction of the property is completed. So we may actually enter commitments or we may have commitments on our book, which from a regulatory and an RWA perspective are "unsecured" until these prerequisites are being met. So -- and sometimes, there's a certain backlog on keying-in and accounting for the securities or the collateral, which we hold, which we already hold, before it becomes effective in terms of RWA calculation. And that's the case here. That's a purely technical thing.

And the other thing is the usual reclassification work as part of annual reviews and things like that when a new rating is assigned to decline or to transaction or whatever. So that's it on the first point on property valuation.

When I say, medium- to long-term perspective, now I would have abstained from giving exact figures on that. But what it means is, and I'll give you an example, which for the sake of easy calculation is sort of a domiciliation. If you assume EUR 100 million market value in 2019, and you say the property, probably -- the property value probably decreases by 20% in 2020, then the property value is EUR 80 million. Now if you go one step further to '21, and so you have an increase of 10%, then the property value is EUR 88 million. Now if you would define sort of looking through the cycle -- or over the cycle between these 3 years, then the -- over the cycle, so the midterm expected property value is EUR 88 million, and that's been applied instead of the one which applies to 2020. That's something which is in line with the suggestions and alleviations indicated by ECB to use the figure, which takes a long-term view or medium-term view and which reflects a situation where we see the property ending up in terms of value over time.

And that's what we applied. Well, we do not -- we do not give out the exact deltas to that figure. It does alleviate the situation, but it's meant to alleviate the situation. But I hope, in principle, it's understandable what we do and what we mean.

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Operator [7]

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So next in line is Tobias Lukesch from Kepler.

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Tobias Lukesch, Kepler Cheuvreux, Research Division - Equity Research Analyst [8]

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Firstly, I would like to touch on that property valuation question again. So on Page 12, you outlined that, and you just gave that example. But how would this translate into P&L effects and capital effect, basically? So if you -- you don't want to give all the model parameters, I understand that. But maybe you can give us a bit more of flesh to the bone here. You also mentioned the U-type shift and the adverse scenario with property valuations down minus 35%. So maybe you can give us here some values with regards again P&L and capital, how they would work out?

And secondly, on the development loans, you -- could you remind us of the default rates of these loans in the last crisis? And why this time, things look much better, basically? I understand it's due to the contracts, the covenants and so on. However, you just also mentioned the kind of technical unsecured exposure at the time that you have. Again, in a worst-case scenario, what kind of losses could result from these technicalities?

And then on LTVs and the interest, the ISC. There are some reports that, for example, in yes, big mall -- malls can only collect rents in the amount of 16%, maybe 30%. But if I interpret the ISC of 300% correctly, you would just need 1/3 of rents being paid. So if that number is temporarily below that, how can then your customers make good for that? And how would you assess the situation as a whole?

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

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Okay. Just thinking of which question to take first. I think the one where I can say, least, I'll take first. I mean I -- to be honest, I can't really remember because I wasn't around what the default rates were last crisis of development loans. But they probably were not insignificant, judging by the general nature of it. I think what, in principle, is different to 2008, 2009 is 2 things. First of all -- or 3 things. First of all, from our bank's perspective, we have much tighter organizational and administrative measures around how we manage development loans. A large chunk of defaults of development loans in crisis comes from the fact that the administration of disposal of loans, the monitoring of progress, the monitoring of the fulfillment of conditions is done in a slack way. I would say if there were lessons to take from the last crisis, this is one. And this is where we have a extremely strict process behind that. We are pain in the neck for our clients when it comes to proper administration of the disposal of money and things like that. That's the first one.

The second one is, in the past, we have done development loans only after very clear stipulations in terms of presale or pre-let plus equity. Usually, in the last crisis, you were happy to see an LTV of 18%, 19% or less than that on such exposures. That is much better nowadays, the loan to cost -- the loan-to-value is -- provides much more cushion of equity in such a transaction.

And the third one is, we are strict on pre-let and presale. As I said earlier on, for those which are coming to market now, in most of the cases, we look at 100% pre-let or presale. So that gives you much more comfort that development is something which we will manage and will do good with. That does not exclude that we say -- we may see mishaps coming through the door. But structurally, those are the preconditions for having this business on our books.

So that's one thing. The other thing is also, say, a bit more general thing to discuss. If you had malls which return only 20% or 30% of their usual revenues, how do landlords deal with that? Now the first point is, when you look at the way how we analyze our business, it is -- the first point is, is it a good property? What was it's property value and whatever? The second thing is, do we have a sponsor which is able to provide money when there's need? The third one is, what is the composition of the tenant structure?

Now so -- or to take it the other way around, if the tenants do not pay up, it's the sponsor we go to. So -- and that's why we have covenants. This is why covenants mean either a covenant for cash drops. Whenever there's still cash in the operation, the cash is left in the transaction, all that equity is actually being provided.

Now if that does not work -- and so far, we have the known cases in the U.K. where it does not work. But that's not corona-related, that's only anticipated by corona. If that doesn't work, we have to sit together and work out the situation. And this is where -- when it relates to corona-related situations, we talk about payment postponement. We talk about the restructuring of the loan. We talk about some sort of forbearance without being forbearance and without triggering a default. That's something which is possible under the rules and regulations which are prevalent now. And that's the way how we go with that.

But also to be clear, this is going to be one major topic in the second, third, fourth quarter when we see how liquidity is being used up. And how things -- how liquidity becomes short on the sponsor side. So far, we have no new default cases on retail. No new default cases at all -- but especially on retail, we have not. But that's the sequence we will take when it comes to it.

Now on valuations, that's the more difficult one because I can't really say much about it. You see with the calibration, which -- and calibration sizes or spreads, which we have given here on Page 12 and on Page 11, that we came up with additional loan loss provisions, stage 1, stage 2 to the tune of EUR 30 million. Now all I want to say and I can say in this respect is that the -- that's a calibration which comes on top of -- which comes on top of the EUR 30 million or EUR 32 million, which we have already accomplished last quarter -- or the quarter before last quarter. So how much economic indicators must change or have to change to add another EUR 30 million to that, we would see by second quarter.

The good thing, in regulatory terms, is that the applied risk calibrations -- parameter calibration, which we introduced fourth quarter 2019, are already meant to be, more or less, over the cycle, which you can read from the fact that RWA increased by EUR 6 billion in -- gross EUR 6 billion in 2019. And exactly with the consideration and with the explanation that we would like to stabilize the ship and make it more resilient over the cycle. So from regulatory side, I think we're -- and that's your question regarding capital. I don't say we are safe in the safe harbor, but I think we're well protected and well covered on that side.

P&L-wise, we are, in our calibration, somewhere between -- based on the adverse scenario. And the more adverse it will be, the more we will have P&L risk costs coming through. But the problem is -- and that's the nature of withdrawing guidance, if we would know, now we would give guidance. As we don't, we'll have to wait a little bit further.

So that's a little bit wobbly answer to your question, which I fully understand. But to be sort of consistent with the overall picture, that's the way I can't answer it.

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Tobias Lukesch, Kepler Cheuvreux, Research Division - Equity Research Analyst [10]

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Okay. If I may follow up. I mean in looking at the calculations and not quantifying it, but maybe a qualitative judgment on covenant breaches due to LTV versus real payment default, so to say, right? How much in the forecasting that you're doing is an LTV breach? My understanding is that so far, all the loan loss provisioning we have made was basically due to LTV breaches, but not really to cash things. How would that basically change things for you?

And then maybe another on capital. So the increase in RWA that you mentioned, I interpret it very much as being a kind of fully loaded Basel IV figure. Is that, a, still right? And b, if that is the case, given regulatory support that you are only partly taking, is there any chance that things are being reversed with regards to RWA classification and so on?

And maybe a last one on liquidity with TLTRO III, how much of a take up would you consider?

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

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Okay. I mean the last one, very quickly, we have, I think, communicated EUR 1.9 billion outstanding. That's partially limited also by the size of the collateral, which you can hand in. That's something which is still going. We will consider what we do when we come to the point to consider it. There's no urgent need to look into that. So are we likely to extend that figure significantly? Somehow don't think so. So that's on TLTRO.

On Basel IV, yes, it still holds, what I said before around fourth quarter results. We've calibrated risk-weighted asset level towards a level, which is in line with Basel IV levels required. We still hope to that. That's the way the bank and the risk weighting and the calibration works these days.

So if you do a comparison across -- benchmarking banks, you will have to differentiate in terms of -- is that as of now? Or is that sort of introduced recalibration of parameters as we have done it? And yes, we still hold to that. We sort of drive towards an RWA level, which is in line with the Basel IV requirements.

Is there sort of a chance to get away from that? Honestly, I don't believe so. There are some signals of sort of delay in the process. But at the end of the day, I think that's the level banks will have to adhere to going forward. So there will be no change from our side.

On LTV or cash breach of covenants, I think there's an important distinction to be made. What you look at is basically significant for any kind of single loan loss provision for (inaudible). That's how we trigger loan loss provision. When we talk about risk costs, and that presupposes that there's an event of default on the valuation side or on the cash flow side.

Now as I said, we didn't have that in the first quarter. We did have one additional single loan loss provision, but on already-defaulted exposure. When we look at the rest of the risk cost, this is purely (inaudible) in stage 1, stage 2 loan loss provisions. Which are triggered by property assumptions around property prices and economic conditions.

And therefore, whenever you try to derive sort of the projection on risk cost, I think it is important to distinguish these 2 things. And also, again, if you do benchmarking across banks to see where risk provisioning first quarter comes from, is it triggered from singular events or is it triggered by portfolio measure? And as I said, we, with the EUR 30 million or EUR 32 million gross figure on the portfolio have -- except for the EUR 4 million, which I mentioned, have written only stage 1, stage 2 provision in the first quarter and same amount in the fourth quarter 2019. So I hope I was clear enough on that.

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Operator [12]

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Last set of question comes from Dieter Hein from Fairesearch.

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Dieter Hein, Fairesearch GmbH & Co KG - Partner [13]

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Yes. So 3 questions regarding your outlook at the end. Firstly, you withdraw your dividend proposal for 2019. And so my question is regarding your dividend policy in the next quarters or years. From your personal view or expectation, how likely is that you will pay for 2019, after October, a dividend? And if you want to pay one, is it then the EUR 0.9 you proposed or might it be lower? And from your expectation, do you think it's possible or likely that you pay for the financial year 2020 dividend?

Secondly, once again, back to Slide 12 and your expected development of market values. If your expectation is right, is it fair to say that under these conditions, your LTVs should increase significantly? And can you give us your expectations compared to the current level for the next 2 or 3 years how your LTV should develop under these conditions?

And thirdly, you withdrew as well your pretax profit guidance for the current year. So you want to update us on a later stage, but 2 general questions here. Do we expect a profit for the current year and next year? And secondly, as you mentioned before, in the first quarter, EUR 28 million were stage 2 and 1 risk provisions and only EUR 4 million stage 3 for the next quarters to come. Is it fair to assume that the stage 1 and 2 provisions should decrease compared to the first quarter under your -- the expected development of the economy and stage 4 -- sorry, stage 3 risk provisions should increase in the coming quarters?

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

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Thank you, Mr. Hein. Again, I'll do it in reverse order. I mean we took back profit guidance. So I will be a little bit reticent on trying to give profit guidance through the back door. And so far, I think what I'd like to repeat and what may give a sort of hint is what I said early on, we feel sufficiently okay that we will deliver a good operative performance.

And I tried to explain why we have reasons to believe so as of today and as we speak, to speak about a relatively stable development of our loan portfolio with consequent assumptions on NII development. I said a few things about the administrative cost and the cost management, which we apply to it. The third element is other line items, which, in our case, are relatively uninteresting and not very much moving. So that remain -- that leaves 2 other things, which are the reasons why we did withdraw guidance, and that is risk cost and fair value adjustments.

So in terms of your question on that, I would leave it at that. You did ask about projections on LLP, stage 1 and stage 2 decrease or increase in stage 3, increase -- decrease. Let me say the following: If nothing else happens and we can adhere to our economic outlook and the property prices, as we have given them, the assumption would be that we don't need to do much on our stage 1 and stage 2 provisioning.

However, I also said that's something which is moving. And against the figures which we gave on Page 11, you have seen more recent publications from research institutes, giving a more dire view on the economic development. We have to reassess that, and we have to go back to our drawing both and have to see what we do in terms of stage 1, stage 2 developments there. So that's as much as I can say.

And the third one is where we have been fairly quiet is to project any stage 3 developments. That's something which we wills see when it comes through. The likelihood that something comes by the -- given the situation which we are in, is sort of more increasing than it is decreasing. That's probably as much as I can say without getting scolded by our legal people.

The -- now market value of LTV, I think that's relatively short thing to answer. We don't do sort of wholesale revaluation of LTVs. So we look at that when we when we have new investment proposals -- so transaction proposals, we look at that as part of the regular annual review or we look at that if we have reasons to look at that in terms of customers, not able to pay or there's a significant deviation -- evidence for deviation and value.

So yes, I think you will see some increase in LTVs coming through. How much that is going to be, we will see. And to which extent that triggers default, breaches of covenants and so on, it's also something which we will see. I think we have the benefit of having very conservative ratios on that. And therefore, there's a certain significant buffer against the changes.

On dividend, well, even a personal view, I think, is not allowed in this context. I may have...

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Dieter Hein, Fairesearch GmbH & Co KG - Partner [15]

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Yes, does your company have targeted to pay a dividend if it's possible?

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

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No, that's a good question because what I can say is that we have a dividend policy out which we have not revoked, and the dividend policy says the company pays 50% base and 25% on top, if it is appropriate, and the situation allows for. That has not been explicitly revoked. So it's -- formally, it's still in place. But I think it is an unspoken and common consent throughout the industry that in times where the economic situation is unprecedented, be it in terms of unemployment figures, in terms of drop of GDP or all that, that everybody keeps the money together and is careful about that.

Now that's not an outright revoke of the dividend policy. But that is something where I think everybody would assume that this has been treated with utmost caution and utmost respect.

But that is as much as I can say to that point.

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Dieter Hein, Fairesearch GmbH & Co KG - Partner [17]

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Maybe one add-on, and there was a similar question from our colleague before. The financial market crisis, your former mother Hypo Real Estate went bust. And how confident are you that the current crisis will not develop to a similar situation to PBB?

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Andreas Arndt, Deutsche Pfandbriefbank AG - Chairman of Management Board, CEO & CFO [18]

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Fair question. But I think I tried to make it clear at the end of my presentation. That there are 2 fundamental reasons why we believe it is different. The one lies within the bank, and the other one lies within the markets. Now as far as markets are concerned, this is not a financial crisis. This is an overall general crisis of the economy where banks, together with regulators, with politics, went into with a clear understanding that it is vital that banks continue to provide credit to the economy, to people, to individuals, to enterprises, to transactions, to keep the circuit going. That's one thing.

The other thing is as the -- as a sort of general view on the market -- on the banking market, banks are much less leveraged than they were in 10 or 12 years ago. I read, I think, yesterday in an interview from my Deutsche Bank colleague, (inaudible), he said the Deutsche Bank at that time had EUR 1,000 billion less assets on their books. So we are being small animal against that, but we have less, much balance sheet volume, and we have much better capitalization. And we have much better LTVs and much more resilience in our books.

So structurally, the entire banking market is in a completely different shape. Although the overall profitability may not be satisfying such that structurally risk-wise, structurally, balance sheet-wise, I think we're much better shaped to weather the storm. I tried to give an example to that, the buffer, which we have without help of ECB somewhere around 6.5 percentage points buffer of our regulatory requirements. With the cushion provided recently, it's almost 8%. That's unprecedented. And that shows where we are in terms of resilience, in terms of shock-absorbing and stress-absorbing capacity.

So -- and that basically already sort of the answer to the second dimension of the whole thing. How is the bank positioned? I think the bank in terms of capitalization, in terms of liquidity, liquidity profile and in terms of operational setup and risk discipline is in a completely different ballgame and just different field than anything which you have seen 10 years ago.

So you can't compare what has been done in a very special situation 10 years ago to what you see today. As I said, I think with the structure, which we have with the business model, which we run, we are right positioned in the right spots and correctly positioned risk-wise and business-wise to weather this storm.

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Operator [19]

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We have one question left, which is Philipp Hasler. But unfortunately, Philipp, we have exhausted our time slot. So I promise we'll get back to you and take this offline, but we really cannot answer it in the context of this call.

This leaves me with just the closing remark. Thank you, everybody, for participating in today's call. And we appreciate your continued interest in PBB, and we'll be back with Q2 results in August. Until then, please keep safe and well. Take care. Bye.

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

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Bye.