Deutsche Pfandbriefbank AG (PBB) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Deutsche Pfandbriefbank AG Analyst Conference Call regarding the preliminary results 2022. [Operator Instructions] Let me now turn the floor over to your host, Andreas Arndt. Please go ahead.

Yes. Good afternoon, everybody. Andreas Arndt speaking. Very much warm welcome to all of you for the pbb Annual Results Call 2022. I'm sitting here with my colleagues, Thomas Kontgen, Andreas Schenk and Marcus Schulte. We're looking forward to sharing the full year news and results for '22 with you, and we're looking forward to give you an update on our strategic initiatives as well as on our midterm plans. I will walk you through the results and give you an outlook going forward for the year 2026. Afterwards, as usual, we would be happy to take your questions and answer your questions as much as we can and discuss our business with you. 2022 has been an exciting as well as a successful year, exciting as we were able to introduce our strategic initiatives to you in March 22 that since then, we have not only revised, detailed but also expanded. One major milestone was the announcement of our new business area real estate investment management in December, and it was successful because we managed to achieve a PBT of EUR 213 million in a challenging economic environment that allowed us not only to meet our guidance, but to do so in the upper half of the -- then guided lower end of the guidance. Of course, we can by no means rest on our laurels. On the contrary, times have changed over the last 12 to 18 months significantly and increased market rates and higher -- with higher cost of capital requirements, which is relevant for the strategy of the bank, the positioning of the bank. That, we want to create additional value for our stakeholders, for shareholders, for clients and for colleagues by concentrating on our position as a leading European specialist bank for commercial real estate. And to create this additional value, we have refined the strategy, as I said, which we presented to you a year ago. We are working on 3 pillars. We intend to profitably grow in our core business, the Commercial Real Estate Financing. Second, we are expanding our business model based on our core competencies, and thus increasing capital-efficient fee income. And third, we are broadening our retail refinancing activities. In all that and in all this, we are fully committed to expanding our green business and reducing our carbon footprint, digitalization of our business as well as the products and services we offer and implementing on our people strategy to attract young talents. In addition, we intend to remain a reliable and attractive dividend stock for long-term investors while strengthening our profitability and the green transformation of the real estate sector. That all translates into figures. Last year, we started giving you more concise outlook for the -- on a midterm basis. This year, we adhere to that. We follow that and add some more information. By the end of '26, all that what I just mentioned should lead to ROE of more than 10% pretax, a PBT of more than EUR 300 million, accompanied by a cost income ratio of below 45% and a CET1 ratio of more than 14%. Our dividend strategy is planned to remain at 50%, plus 25% special dividend. Those are our plans in a nutshell. We'll walk you through them in more detail after I share the full year results with you, which brings me to Slide 7. Even though we have faced some challenges, as everybody did in these markets, we delivered well on '22 with a pretax profit of EUR 213 million. We even achieved the upper half of our forecast range. We continue to run a strong capital base with CET1 ratio of 16.7%. That, as many of you know, is calibrated towards the expected Basel IV levels. This ratio provides flexibility for profitable growth opportunities that we will discuss today. Now let me turn to the operative highlights of '22 on Slide 8. We demonstrated, I think, top line and strong top line resilience against the market trend. Our Real Estate Finance portfolio grew by 6% or more than 6% to EUR 29.3 billion, with stable new business of EUR 9 billion going with it. Gross interest margin was approximately 170 basis points with strong pickup in the fourth quarter, which is a strong development, which by the way, also carries into '23. That basically means against the first 3 quarters and the 3 quarter average of 160 basis points that were up 40 basis points for the fourth quarter. In addition, we saw favorable funding conditions with the growth of pbb direct by 38% to EUR 4.4 billion, which now as we speak, stands at EUR 5 billion. And we continue to deliver attractive shareholder returns with a dividend proposal of EUR 0.95 per share. The requite payout ratio of 75%. We will continue our dividend strategy for the years '23 to '25. The payout, as before, continue to depend on economic viability; macroeconomic risk in general; and industry-specific risks in particular, which includes ESG risk. It includes also existing and foreseeable regulatory requirements that need and future growth and investment measures of economic availability. For the special dividend distribution, i.e., the 25%, the sustainable CET1 ratio of 14% is regarded as reference point. Now let me skip Slide 9 as that will be covered later and turn to Page 10 on CRE markets. In commercial real estate markets, investment volumes plunged in quarter 4 last year, both in Europe and the United States due to weak market sentiment. The number of buyers and sellers fell to lowest level since 2013. And due to the ongoing difficult investment environment, it can be expected that the deal volume will continue to face downward pressure in '23. In Europe, values in '22 was still relatively stable in almost all markets, but yields are now moving up. Prime office yields increasing in all markets. Logistics expected to see relatively strong price decreases while residential values are expected to decline less. The positive factors in that by looking at the commercial real estate market is, first, the recession is less severe than initially thought of when we were at the time of planning. The -- what we observed is also that the take-up of rental space is still at good rates. And the LTVs, the loan to values, at least for the prime segment are still low. And also, while interest are high and will remain for some time or for some quarters to come. The medium- to long-term outlook on the curve indicates that low rates are going to come. And attractive office space, attractive locations attract good people, good talents. That's part of the talent scouting and sort of fortifies the values of the property. To give you an example, occupancy in high-class buildings in New York is 30% higher than the average rest. On the other hand, talk about challenges. It is still unclear how interest movement -- the rise of interest translates into yield movements and valuation. The journey has just started there. And the bid/ask spread is still wide. Structural challenges meet with cyclical challenges and are difficult to keep apart. And the question is still out how working from home, online trade and ESG will basically work on the values of the properties going forward. So there is a question mark about the predictability. And presently, the valuation companies in their valuation expertise lead the pack in trimming down prices while we don't see enough transactions to support that. So the conclusion of all what I said is we will see 3 to 4 quarters of increased uncertainty before markets will find new prices at reasonable transaction levels. Uncertainty in price receptibility will be less where property and locations are prime and green, and the market will differentiate more into those 2 segments. And the prime segment and the core segment is just to remind everybody that where we are, where we strive to do our business. Now that brings me to Real Estate Finance new business and portfolio. Looking at our Real Estate Finance business, we see that the strategic portfolio grows significantly, has grown by 6% -- more than 6%, while new business margins have picked up. I just mentioned that. It's, over the rest of the year for '22, a pickup of 40 basis points in the fourth quarter. The growth is driven by strategic initiatives, i.e., our used business and green loans, and it is also driven by low prepayments. The risk positioning in new business is unchanged with average LTV of 54%. And just to hit to that point, prolongation is at 30% -- stand at 30% of the total new business. In fourth quarter, it was actually 50%, which is attractive to us because extension margins tend to be higher than the average. In '22, new business focused on Germany, United States and the Nordics. I'm talking to Slide 12 now on new business and portfolio. Many property types were office, residential and logistics. We saw no new commitments in property types such as hotel and retail shopping, except for the extensions, which we did. And the average portfolio LTV was at 51%. Now turning to Page 13, the slide with the funding matters. Well, as it is, as it happens to be, we need some money to finance the business, which we do on the asset side. Likewise, on the liability side, we saw a strong development on the funding base being cost efficient on the Pfandbrief, but also very good growth on senior unsecured. We set a strong focus on benchmarks, asset matching currencies and green financing. For the unsecured funding, that was dominated by green senior preferred issuances, where we did 3 benchmark and 1 tap and also still talking about capital market measures. The Pfandbrief funding was 4 benchmarks with 1 tab and doing well. As a trusted partner of retail investors, increasingly leverages its retail deposit platform ppb direkt. We -- and at the same time, we repaid TLTRO of EUR 5.75 billion with the remaining volume of EUR 2.65 billion to be repaid in '23 and '24. So that means that sort of compared against '21. We mobilized almost EUR 1 billion more in capital markets funding, plus EUR 1.2 billion in private deposits, which all adds to a very strong liquidity position of the bank. Now Slide 14 gives you a quick overview of the structural differences or structural changes of funding costs for the 3 instruments I've just referred to, senior preferred, pbb direkt and Pfandbrief. While Pfandbrief is flat as iron, the senior preferred has moved out, as you know, as we discussed many times. And pbb direkt as retail deposits have been advantageous in terms of the real cost to the bank, which large parts of the last year actually was below the cost of fund brief. So that also did help us a lot in terms of not only raising liquidity, but also keeping the funding cost -- the average funding costs at same. Now Slide 16, I've already covered, turn to NII and NCI on Slide 17. Looking at NII and NCI, ppb proves strong NII resilience, while income from realizations was significantly lower. That's one of the major movers in '22 on the top line or the operating income side coming from EUR 81 million to EUR 15 million, i.e., losing out EUR 66 million there. NII was supported by resilient portfolio profitability and growth. As I mentioned, EUR 1.7 billion year-over-year and EUR 1.4 billion as average increase in Real Estate Financing volumes. The numbers contain TLTRO effects -- the numbers for '22 contain TLTRO effects of approximately EUR 40 million, which were there up until the 23rd of 11 -- 23rd of November 2022, after which the former calculation algorithm was replaced. Overall, the change in regime did not affect NII in '22, but so by its absence in '23. Modification and hedging impact as related to ECB's change in calculation regime were manageable to -- negligible. Looking ahead, our new business line real estate investment management is expected to provide further capital efficient income, NCI in the future. Now turning to risk provisioning. Our level of risk provisioning confirms that our conservative positioning throughout this cycle is the right approach. Looking at the figures in detail. The net additions of EUR 5 million, they stem from improved macro and model parameters, which compensate for the stage movements and increased in management overlay, which adds up to EUR 69 million, covering potential office markets risks stemming from ESG transformation, potential deterioration due to interest rate increases and yield shift and stagflation rises. The bulk of the LLPs shown in 22 accounts comes on Stage 3 with a net addition of EUR 39 million, mainly driven by shopping centers, especially in the U.K. in the first half of '22, which we have reported and discussed a couple of times. Non-performing loans went up by EUR 255 million year-over-year to EUR 835 million due to new NPL loans, mainly use office in fourth quarter '22 with almost no provisioning needs. NPL ratio, therefore, remained low on 1.6% level. And the coverage ratio went down to above -- approximately 25% after 30% to 35% before. Now Slide 19 shows you the trajectory, the development of the risk provisioning. As you see, we have built up since 2019, a comfortable buffer for challenges to come. Our conservative risk profile aims at a long-term sustainable provisioning level of 40 to 80 basis points on the Real Estate Finance portfolio throughout the cycle. Average risk costs, just for your calculation, average risk cost for 2018 to '22 on average stood at less than 25 basis points. The general admin expenses on Page 20 -- on Slide #20. As you can see, cost discipline remains the integral part of the strategy. We increased investor spend by 12% almost entirely on admin expenses. While the overall cost increase stood at 2%, mostly owed by -- owed to less restructuring expenses and the personnel cost and little impact from inflation due to long-term service contracts which we maintain. So 46% is the cost-income ratio. It's slightly up against last -- the year before, but I think still on a very competitive level. We'll say, investment in strategy, investment in strategic and regulatory projects continue to prevail in difficult times in order to achieve efficiencies of strategic mileage in later times. This comprises the initiatives, which we have already discussed a couple of times, i.e., the client portal, the digital credit workplace, the ESG program and now also the Real Estate Investment Management. Still, regulatory projects, which are not necessarily strategic in time, but which are necessary, make up 30% to 40% of our investments. Now that all adds up, and so to summarize it in the PBT figure on Slide 21. Our over the site PBT remains at EUR 200 million and more. pbb's business model and positioning provides a reliable and resilient earnings performance. The key drivers for the '21 to '22 change were, as I mentioned already, interest rate-driven decline in prepayment fees from extraordinarily high previous year levels of EUR 81 million to now EUR 15 million and also the significant reduction in flow revenues to the tune of more than EUR 30 million due to the change of negative interest rate regime towards positive rates, which basically led the flow income evaporates after the first quarter 2022. So that was compensated partly by a decrease in risk provisioning by EUR 37 million and by compensating NII from new business. On the capital side, there are no surprises. Fairly steady and straightforward development of the risk-weighted assets, which are sort of slowly up year-over-year mainly due to the increase in Real Estate Finance portfolio and FX effects. While on the capital side, we show a fairly steady picture. Now let me turn to the ESG topics on Page 24. As I've already mentioned, the green transformation to a net zero carbon emission world is a driving force in all of what we do in the bank. We aim to lead the green transformation of the real estate sector as an integral part of our credit process. We continue to analyze the extent to which both our new business and existing portfolio are green. All in all, so far, we have analyzed approximately 50% of our Real Estate Finance portfolio and on this basis have identified a green portfolio share of 11% or 24% by year-end if you scale it up to 100% of the portfolio. Furthermore, we have also increased the green loan volume, where our clients explicitly agree on a green loan documentation by EUR 1.2 billion. We've also made further strong process on the funding side. We have issued EUR 1.9 billion in green bonds based on pbb's green bond framework. Now have a volume of EUR 2.9 billion outstanding. And meanwhile, as we speak, it is EUR 3.3 billion. With that, we are a leading green senior preferred issuer in Europe. Slide 25, we're again and again [ being last ] of how we organize and we manage ESG throughout the bank, and the chart which you see on this page should give you an impression how very much emerged in most the ESG topics are in the structures of the bank. ESG has become a holistic and integral part of our setup and operations. As already introduced before, we have a comprehensive ESG program in place, covering all ESG dimensions and spending across the whole bank with both involvement and responsibility and being part of the Board's performance targets. Based on our business model, sustainable finance, of course, forms one of the key elements in our ESG strategy. In '22, we made further strong progress besides progress made with our -- with regards to green loans, green assets and green bonds. Our progress is also acknowledged by third parties. pbb ESG ratings have further improved, namely from MSCI from an A to AA. And just recently, a couple of days ago, we received news from Moody's on the ESG rating from limited being increased and advanced to robust. We've introduced rating standards for green loans and green asset qualifications by scoring along 3 dimensions. First of all, carbon savings and, I repeat and, certifications and additional criteria important to commercial real estate, such as energy and isolation standards and buildings, traffic and public transport facilities and things like that. So it is important to note that rating and scoring criteria are not all criteria as you have it in many other cases, but/and which makes the whole exercise a little bit more severe and transplant and moves it closer to the EU taxonomy standards. So with that, eventually, we cover regulatory and reporting requirements, credit and risk evaluation and green as means of doing business. We will further promote these aspects by a partnership and participation in a joint venture consulting company, which we set up together with Gross & Partners, one of the leading development companies in Germany just been signed yesterday. We deliver the regulatory, the risk, the valuation and the financing expertise. G&P covers the technical part, which is admittedly the most important thing because nothing gets green unless it is being done in order to transform around building into green. That is ESG expertise and value preservation for our clients, and that is commission income and additional green loan business for us. And that is a small -- a step, a small step, but it is a step towards carbon-neutral -- carbon neutrality for us as a society at large. We do try -- that's shown on Slide 26, we do try to measure what we do. We made strong progress on ESG data, which allows operationalised KPIs and KRIs in order to manage performance, risk and actively steer the portfolio. Proprietary green tools systematically collects financed buildings carbon footprint and scores each building green -- according to its green content in alignment with EU taxonomy. As mentioned, REF portfolio, I brought that point already, as mentioned, at this stage, 45% to 50% has been scored. And the scoring goes on, and it should be -- the scoring should be affected by year-end to a total extent. Based on ESG data, pbb is actively giving structured feedback to clients. as basis for intelligent transformation of financing offers such as CapEx loans. And the green share of total -- our Real Estate Finance portfolio is currently at 11%, as mentioned, or 24% on a fully scaled basis. Good news is that customers increasingly accept explicit green loan documentation subject to respective reporting obligations. So as you can see, we have a good and strong basis for future growth. In '23, we want to invest in our strategic development and go on growth cost in '24. We do not make and we do not want to and will not make any concessions concerning risk management and risk strategy and our cost discipline. We want to continue to navigate our risk profile and remain reliable in terms of dividend yield and payout ratio as a leading dividend stock in the market. As mentioned earlier, and as that leads us to the next session, we built on 3 pillars: profitable growth in our core business, commercial real estate financing, first; and the second, expansion of capital-efficient commission business; and third is broadening retail refinancing activities. In all that, we focus on becoming greener and more digital. And in our view on the activities, which fit into that is shown on Slide 28 with 6 initiatives and program paths, which we follow suit -- which we follow up with -- through '23 going forward. We started to put concrete initiatives in motion already in early '22 and refine them throughout the entire year in order to further strengthen our profitability growth and adapt our strategic focus to changing market conditions. I mentioned the increase in requirements of cost of capital due to increasing market rates. And the 6 elements, those are, first of all, profitable growth at higher margins. We optimize our portfolio to drive profitable growth in our core business. Second, green finance. We want to become the leading green commercial real estate transformation financing partner in Europe. And third, revenue diversification. We launched new business lines to diversify revenue streams and increase capital-efficient income. Fourth is focused on core business. We tailor our balance sheet structure towards a core Real Estate Finance business by combining value portfolio and public investment fund, finance to benefit from a controlled roll-off and lower liquidity and overcollateralization cost. And #5 on the list is funding diversification. We diversify our funding base by further accelerating retail deposit growth. And last but not least, 6 is digitalization and operational revamp, we digitalize our customer portal and processes. We reduce complexity while maintaining strict cost discipline. And finally, not to be forgotten, we would achieve that by having and by employing the right people. We have an exceptionally strong team on board, and we have a clear people strategy and initiatives to attract young talents to enable change towards our targets. This is -- or the [ bite of ] prerequisite for any success going forward. Now let me briefly elaborate on the 6 initiatives. We grow our real estate focus -- Real Estate Finance business in 2 dimensions, volume and margin, while average risk weights to be remained or to be left unchanged. And we exploit selected market opportunities across asset classes while keeping our risk conservative approach. Progress will be carefully measured. We reallocate portfolios to continue to improve our margins based on current market opportunities according -- across the asset classes. Now on property types. We do reconsider to cautiously focus and refocus asset class spectrum comparable to precrisis strictly within the strategic scope of pbb. The same holds for property locations. We continue our diversification and geographical expansion into attractive markets. And as I said a couple of times before, U.S. remains an important target markets. U.K. is a market where we see in the long run more opportunities and selectively also in CEE. On product types, selective expansion on higher-margin product types in combination with green or ESG initiatives, such as developments potentially also outside of Germany; and Green CapEx Loans, which should add to profitability in terms of higher margins. So with each of our portfolios, we further strengthened profitability focus when steering new business. And by 2026, our Real Estate Finance portfolio is planned to be at EUR 33 billion, with a gross revenue margin uplift of more than 15 basis points. Now the second initiative, which is green finance. I can make it short because most of the topics I've mentioned already, it's about establishing sustainability expertise and profile -- expertise profile beyond lending, for instance, by entering in green consultancy. On the lending side, as I said, we increased the share of finance green properties. And I emphasize, again, the importance of green development loans and green CapEx facilities. We built out a comprehensive ESG database and holistic database for the bank and for the customers. And looking at bonds, we are leading -- we are already a leading issuer of green senior unsecured bonds, and we would like to keep it this way. And consulting side, we offer our clients independent and voluntary consulting services for holistic solutions. Now the third project stream is revenue diversification. Looking at off-balance sheet revenues, we leverage our core commercial real estate competencies by capital efficient diversification of our income. Let me start with pbb Real Estate Investment Management. Here, we finalized the ramp-up of our new business model. We had an experienced new -- we have an experienced new member for the Board already hired and onboard by the 17th of April, and further hiring of senior IM, investment management, experts is underway. We have established a distribution partnership with an industry leader, of which you will hear more soon. And we complement in-house capabilities with the funds administration partner, well-known Universal Investment, see the yesterday's or the day before yesterday's press announcement. We are setting up a dedicated brand pbb invests with investment management subsidiary to follow in the medium term. We built a comprehensive commercial real estate product suite entailing commercial real estate equity investments and expand into debt investments. And the second line also on this page is -- refers to pbb debt products. We spend and intensify servicing and serving of our institutional investor base by understanding their investment needs. We leverage our extensive market access to source their preferred real estate debt types. We broadened our product offering to provide exactly the required formats such as debt fund. By '26, 5% to 10% of our operating income should originate from fees and commissions. Now the next section refers to focus on core business and on funding diversification. Again, most of the things I mentioned. We focus on Real Estate Finance, goes without saying, and we do that also by merging the Public Investment Finance and the Value Portfolio segments into one non-core units. In the light of reallocation of resources to our core business, we minimize overcollateralization of the public sector cover pool and thereby lower funding costs. And we follow a value-preserving approach to consider and in considering opportunistic accelerations of the portfolio options. And the other important block under this headline is about the funding diversification. We will further strengthen the pbb direkt channel by building on strong growth in '22, I mentioned that through brand building and online channel optimization and by also diversifying deposit sources through strategic partnerships, i.e., deposit brokerage platforms or partners, corporation partners such as providers with Banking as a Service. Now on Slide 33, the last block, the last building block, the last pillar in our building of growing the bank, which is digitalization and an effort to drive quality, speed and efficiency, where we retain cost control and carefully reallocate costs to value-creating activities on the investment side. We further expedite the successful introduction of our digital client portal and continue to reap the benefits. And we continue our part of the process of digitalization on the credit work in place through things, instruments and means, such as artificial intelligence assisted pipelines and resource allocation and things like that. We aim at further reducing complexity, increased customer loyalty and satisfaction and create room for profitable growth. It is also when you look at the platform away of creating platform and means of standardization for the scaling of debt products. So here, efficiency measures and business or earnings measures, actually Tally and Dovetail have come together. We leverage selective cost measures to finance investments and growth opportunities, and we build on our strong record of maintaining cost discipline despite ongoing investments in strategic initiatives, digitalization and pressures on costs due to inflation. Now the time chart on Page 34 is an easy one. '23, as I said, is the year of investments. After which '24 and '25, we intend to accelerate our performance in '24 and '25. And '26 thereafter, we want to release our full potential. That is built on the assumption that markets will have stabilized by the end of this year or beginning next year and begin a positive development thereafter. Now what does that mean in terms of figures for our immediate '23 guidance? On Page 33, '23 -- Slide 35. In '23, our investment year guidance for PBT is between EUR 170 million to EUR 200 million. We expect Real Estate Finance new business between EUR 9 billion to EUR 10 billion. And an NII plus NCI above EUR 450 million, which is about flat against last year if we discount for the lack of TLTRO and assumes that we compensate for the now complete lack of flow contributions by higher business volumes and higher margins. Despite the challenge ahead, for real estate markets in particular, risk provisioning is planned significantly less negative versus '22. This is supported by our strong stock of risk provisionings and takes into account a moderate release of loan loss reserves as markets recover. I mentioned the appropriate levels of provisioning earlier. We expect a cost income ratio of 50% to 55% and the return on equity after taxes at around 5%. Now the summary of that is, again, found on Page 36, and that brings me to a quick summary on the points which are made. With strong resilience, reliable operating performance and strong capital basis, we have -- pbb has the flexibility to further grow and deliver attractive shareholder returns across the cycle. Second point, building on this robust business model, pbb intends to achieve an ROE of 10% or larger by '26 by implementing strategic initiatives. pbb intends, and that's the third item on my list, intends to grow strongly organically in its core business. Expand its capital-efficient fee income and diversify its funding base to enhance profitability and return profile. And sustainable finance is the key pillar across all strategic initiatives as pbb aims to become a leading green commercial real estate platform financing partner in Europe. pbb will continue to carefully balance its risk-return profile and keep cost discipline despite growth investments. And the very last page is basically we attempt to depict the constituent elements of the pbb DNA, which centers around being a strong dividend title and providing attractive shareholder returns based on strong resilience, predictable operative performance and adequate risk buffers. With that, I close my presentation. Thank you for your listening in, and now we are altogether happy to answer questions if you have them. Thank you very much indeed.

[Operator Instructions] And the first question comes from Johannes Thormann.

I'm Johannes from HSBC. Three Questions from my side first. Considering your NII guidance of EUR 450 million, including fee income already, it's basically -- if you deduct the fee income, just EUR 110 million per quarter, so significantly down from the level we've seen in Q4. This makes no sense to me especially after the strong Q4. What is driving your cautiousness? And then especially also considering your remarks that you want to see a margin lift-up over time and not a margin decline. And then your volumes of EUR 9 billion are also not so negative for next year. So can you say what have we missed in terms of negative impact for next year? Or is this the usual, we are far too conservative in our guidance and our plan is not that what comes out at the end of the year? That's the first question. Secondly, on your new business initiatives, real estate management, can you be a bit more precise in terms of earnings contribution what -- where you think you can really generate this? Or is this another cap variant initiative with the 0 earnings contribution but a lot of costs in some of the years? And then how do you manage lending risk? Do you offer loans to your fund products? Or is there a separation that you don't do lending through your funding products? And last but not least, on your 2026 targets. The EUR 300 million are basically doubling or nearly doubling the lower end of your current guidance. We need several building blocks to drive this. Could you be more precise to explain how you get there?

Good. Thormann, thank you very much, as always, [indiscernible] questions. I mean one remark to start off with about being far too conservative in our guidance, we think what we have noted down for ourselves and for you to see our targets which are ambitious, and we will have -- we will need all hands on deck in order to achieve that. We are fully aware of the level of ambition, which we also display with that. So there's no sandbagging from our side on the contrary. Now on NII, I would answer that question. I would look at my colleague, Andreas Schenk, to take the question around Real Estate Investment Management. And the '26 question, perhaps well, it goes back to me. Now I think the NII bridge from '22 into '23 is a relatively easy one. We're losing out on 2 components and 2 elements, which we sort of can't -- where we can't fill the pot quickly enough. One is -- and I think I've been quite transparent about that in the presentation. One is that the elements related to TLTRO, which we did profit from, justifiably profited from -- over the last couple of years, basically ceased to be there. So that's a drop, which we can't influence. But it is a drop in revenue line, and we have to reckon with that, and that sort of goes to the tune of EUR 40 million. And the other point is that during the year '22, we still had low income sort of supporting the overall revenue line to the tune of approximately EUR 30 million or slightly more than EUR 30 million, which basically if you add up both effects gives you EUR 70 million, which we have to make good in 2023. Now we do build on volumes. We do build on margins, but we are not with it, and we don't want to do things which we regret thereafter. So there will be a steady buildup of initiatives. And that's, by the way, and basically why we do the 6 initiatives to structurally sort of increase and complement the revenue line in a very structured way, both by on balance sheet -- by on book revenues as well as by off-balance sheet revenues. So that's basically the core of the intended -- the core of the strategy going forward and hopefully also explanation to you what kind of bridge we have to build to reach '24, '25, '26. With that, I would hand over for Real Estate Investment Management to Andreas Schenk.

Andreas Schenk. If we are looking at our investment management, the earnings we are looking for are 5% to 10% of the operating income, as mentioned, concerning the cost if -- or the investments we have in the meantime. So definitely, it will be an investment in the first year. But afterwards, we are coming 2026 to the return mentioned, and the cost is also limited because we are relying here on partners. And if we don't have business coming in, we also don't have to pay here. So our investment is mainly in people not so much in infrastructure. Because we have, as announced yesterday or the day before yesterday, Universal Investment as a fund administration partner, where we have mainly cost if you release enough funds. If we don't set them up, then the investment is really limited. And that's the same is true for the distribution, where we are also working together with a partner. And therefore, the investments from our side is not really an upfront investment. We have costs if we have business. And I think, therefore, the investment is somehow limited in this respect. That's the setup we are looking for. Loans to the fund. We have definitely not planned an increase of income because we are providing loans to our funds. That was not the intention, and that is nothing we have in the plan. So we don't have an increase in this respect.

Sorry, just to interrupt, just on -- so are you lending to those fund products? Or are you not lending just in terms of...

No.

You're not? No. Okay. That's fine.

Yes, not at the time being. We'll start with the first, and then we see how this develops. But we don't do the whole exercise for the sake of increasing our funding volume. We do that because we do off-balance sheet business. Now on '26 and what are the building blocks? if I got your question right, while the building blocks out the 6 initiatives, and they have various forms of contribution, the point is about having a diversified portfolio of measures and initiatives which we want to build. We have identified KPIs or KRIs for each of the initiatives by which we should measure and should be measured against progress in the respective projects. We will not give a distinct and individual breakdown of the individual business cases for the individual measures. Sort of if I refer back to the old colleague of mine, who at some point in time, said to me, Mr. Arndt, you can't sell goose, you sell ducks. Now there will be changes in the composition of revenues and costs and investments over time. The important thing is that we have a diversified portfolio of measures which is there to reach the goal, i.e., EUR 300 million PBT, i.e., 10% return on equity. And the accountability comes from: a, the description of the initiatives; and b, the key performance indicators, which we made public very lavishly, I think made public in order to give us accountability and you -- give you the opportunity to follow suit with the progress of the project. That is as much as I can say at this point in time, Thormann

Okay.

Okay. It doesn't sound entirely enthusiastic, but...

No, because there is no -- it's like you never made EUR 300 million profit before taxes, not by far.

We never made -- I may say that we never made such a sweeping effort and such a founded investment program for the bank. The bank has been doing well over the last 7 to 8 years. You know the figures. I don't need to repeat that here. By providing a very solid performance, turning back capital to in the forms of dividend to shareholders, giving a dividend yield of more than 7.5% throughout the years. Going for a dividend yield of a little bit over 10% this year. But we do acknowledge that we need to move on as markets are moving on in terms of cost of capital requirements. And we will try to close in on that by setting up a target, which, again, with diversified set of projects is doable and is in the making and where we, I think, have simply the opportunity to show that we can do it. I think we have been wise enough for the last 3 to 4 years to focus on the risk side of the business, on the risk positioning of the bank according to and along the cycle, focusing on our risk conservative business on our prime business. Now as we do have experience with broader scope of markets and products, we do need to employ that at a situation where we believe that by the end of the year, markets will have found their bottom and that we can move on after having invested ourselves properly with a number of initiatives which bring us closer to the goal, which I just noted and which you have referred to. So there's a strong optimism and a strong determination to see that through towards that direction.

And the next question comes from Tobias Lukesch.

Three questions or 4 questions from my side as well. First, I'd like to touch on the NII. You mentioned that you're kind of losing EUR 70 million out of TLTRO drop EUR30 million and the kind of EUR 40 million from the floor income drop. I was wondering if you could strip out again maybe the positive NII effect on the status quo and potentially also then the positive impact you see from increasing the deposit base from around EUR 4.4 billion to EUR 8 billion. On the REF portfolio, if I understand you correctly -- you are basically calculating with a gross margin of around 185 bps minimum. So I would be curious if this can also be a 200 bps you potentially have in your plans for this additional EUR 4 billion, yes, that would be -- maybe we go one by one and go with the NII and the margin question here.

Okay. Now on the margin question to start with that, we've introduced sort of a new term, which is gross revenue margin, which is slightly different from what we have reported so far, and we're still reporting on the gross interest margin. The gross interest margin for the entire year is 170 basis points and 200 basis points for the fourth quarter, i.e., on average for the first 3 quarters, around 160 basis points, making or returning 170 altogether. Now the gross revenue margin is taking into account also revenues or earnings related to the lending activities and attributable to the client and to the asset side of the business, which typically makes another 20 to 25 basis points. It is a reporting format, which I think most of the market sort of goes for. And therefore, we have decided that for some time, we will show both before reverting to gross revenue margin, which is structurally a bit higher than the gross interest margin. So that's sort of to hopefully lift some of the confusion on that side. Now gross revenue margin as we stand and as we go is about 190 basis points. And the guidance being given on that particular page refers to the gross revenue margins plus another 15 basis points, which we would expect to extract from the measures which we have described on that page. So that's basically ambition. That makes it a bit more comparable to what others also use in the market. Now on NII, the positive drift should come from the fact that we contracted another EUR 1.7 billion new business last year, which was interest-bearing only to the extent of, say, half of that as that has been built up over the year and will be fully accretive in '23. So that's one part of the uplift. We do expect some of the margin measures already to come through. That's another part, which should support NII. And of course, and you see that very nicely on this one page or one chart with the 3 funding instruments that was on Page 14, where you optically sort of can derive the advantage of pbb direkt deposits against senior unsecured. The point at the end of the day is we need to substitute one instrument with the other in order to basically reap the positive elements from the newly-diversified funding base. And if you sort of hold against the peak of senior unsecured on that page at 210, 220 basis points against something like 0 or minus 50, minus 60, minus 100 basis points for deposits and you take 1 billion or 2 billion benchmarks equivalent and to subtract the margins against that, you know what the funding advantage is by employing the retail deposits. It is not yet, it is unfortunately not yet what you would achieve against site deposits because we're talking about term deposits, which we also have to price according to market. But it is an enormous cost advantage against the senior unsecured. And again, Page 14 should give you sort of -- or give you an indication of how that basically would work. So those are the elements which we have baked into the plan also for '23. And that should constitute the filling of the gap, which we described earlier on. Is that okay with you, Mr. Lukesch?

Yes. I mean, I'm still struggling a bit to -- also to do the bridge right from the kind of EUR 185 million midpoint that we have for '23 as a pretax profit and the above EUR 300 million? Because yes, taking EUR 70 million out, adding maybe EUR 4 billion on, let's say, 200 or 215 bps, I get to kind of EUR 200 million. Then I'm struggling to get the funding benefit, I mean, to make up for, let's say, a large part of that missing EUR 100 million.

Good. But then I sort of eventually probably misunderstood your question a bit. What you're asking is about the, say, 2, 3, 4 components over time towards the '26 targets. And the -- and I just sort of highlight the elements of it. But as I already tried to explain to Mr. Thormann, probably would not go into the details. The one is on the first initiatives, we're building volume, and we're talking about EUR 4 billion to add, and we are talking about EUR 4 billion to add at a higher margin. So that's one element. And if you take that EUR 4 billion over 4 years or 3 years sort of fully loaded, I mean it's fairly easy. If you take the NII, which we have at another 15 basis points, that sort of give you an indication. And the 14 -- the 15 basis points also not only works on the new business, but it's something which sort of washes through the portfolio over the next 3 to 4 years to come. The second point is from off-balance sheet business. Now as Mr. Schenk said, that's not likely to be a huge figure within the next 2 to 3 years because that's a business in the buildup. But the point -- our point is we don't build business for the next 2 to 3 years, we build business for the long term. And in the long run, we do expect this asset management or funds management business to take a significant part of our revenues and a significant part also in our assets under management. And therefore, it's important to do. The direction which we gave is something up to 10% of our total revenues or total profit. So that's another indication which we can give. We do have, coming to the funding side, 2 drivers. One is retail deposits. And I gave you an indication referring to the price differentials on Page 14, not going into that again. And you should also expect that from the discontinuation of overcollateralization on the public sector portfolio, we would expect significant benefits, which also adds to the top line as well as the bottom line. And the last piece on the list, unless I have forgotten anything, is on the cost side. Keeping costs stable while investing, I think, is an achievement, and we'll stick to that. And I did forget one point, and that's the risk cost side. I think I mentioned that while we have presently 130 basis points provided for on loan loss reserves across the entire book, in times when things are going better, we should expect the level of provisioning, which is somewhere close to 40 to 80 basis points, which also gives you an indication of what kind of release of risk costs we have. And another indication is if you look at the average risk cost over the last 5 years, I did that little calculation myself yesterday evening. If you add up what we basically booked as risk cost between 2018 and 2022, you come up with an amount of slightly over EUR 300 million, divided by EUR 5 million gives you EUR 60 million, divided by an average portfolio of somewhere between EUR 26 billion to EUR 27 billion gives you basically 25 bps as risk costs going forward. So that's sort of the lower end of it, and that is something to keep in mind. If you sort of do off the cap calculation across the board, across these initiatives, I think you will find yourself pretty close to the EUR 300 million, which we have disclosed. That's a better bridge for you.

Yes. That's very clear. On the PIF portfolio, so the noncore means actually this is run down? Or how do you have to understand, I mean are you completely reducing this because you're talking about a reduction in the overcollateralization, et cetera? How should we think about that going forward? Does noncore mean rundown?

Marcus Schulte is happy to answer that question.

Yes. So I think as you can see on the [ second page ], there's 3 elements to it. First of all, we say it's not strategic because we want to grow in the REF business, and we want to have growth in the non-commission income and the commission income area that I think it's a consequent decision to say, okay, we put these 2 portfolios on non-core value portfolio, as you know, is noncore for a long time, value portfolio. If you look at the historical figures basically since 2015, since the IPO half to EUR 9.9 billion right now, and we'll do the same, let's say, for the next 5, 6 years or so, there's a gradual path of amortization. The PIF business was a strategic business that as you know, we basically put on hold, nongrowth from 2019 onwards because essentially, margins were not position for a bank with our capital. And therefore, essentially, we put it on hold, and the business is gradually amortizing. At a similar pace, they both have roughly a maturity, an average maturity of 10 years. Now the key point as Andreas Arndt said, in the first instance is that we say if the asset side is not strategic anymore, that respective refinancing product, which is the public sector covered bond is not strategic anymore. And that means we can basically say the strong amount of overcollateralization that we have to achieve a strong rating, and therefore, use that collateral and we'll not have to use it to refinance on an unsecured basis. So they are the lever Pfandbrief minus unsecured on the amount that we saved in OC. So that's the key tangible, if you wish, this year lever. In terms of what we can do going forward, as I said, that both portfolios have a decent amortization. And one has to, of course, consider that we have hedges in place, that we have to look at the economic efficiency in these instances, that we have to also consider to what extent capital is actually done, be it on the Pillar 1 or Pillar 2 on a rating basis. So we will have to look at different dimensions. But essentially, with spread having come to where they are in public sector or assets and with interest rates having come back, basically, meaning assets become attractive again, that were former high coupon assets, we do see opportunities to opportunistically reduce assets. Also to, frankly speaking, reduced operational costs, let's say, foreign currency bonds, we don't want to have any more, but it will not be a wholesale sell down, not least also. Because if you sum these 2 portfolios up EUR 10 billion roughly value portfolio, EUR 4.5 billion roughly Public Investment Finance, we have roughly EUR 8.4 billion public sector covered bonds outstanding. We would have to -- we cannot go below the covered bonds without actually actively buying them back, which is currently not the plan. So there's quite a few restrictions, but there will be opportunities, and we will use them in a value-preserving manner.

Okay. So I understand this is kind of EUR 0.5 billion capital bound to these 2 segments, which now become [ EUR 1 billion ]. And is there a potential in reducing the admin costs for these 2 segments? If I understand you, at the end of the day, there's no big difference to the setup you have basically run for the last 3, 4 years. So -- but overall, I mean, it's still a kind of EUR 20 million you allocate to PIF or kind of EUR 30 million you allocate to this rundown. Is there a potential to reduce cost on that side?

I'm not so sure there's a huge cost lever. I think, essentially, what we are having is that we are having costs that we have, for example, for assets in currencies that are not strategic to us anymore, that we have to basically pay relatively high average cost for in terms of the administration. And these kinds of things we can say, but I think, the cost lever as such is relatively moderate.

Lukesch, if I may add to that. We did already sort of the first round of optimization 3 years ago when we put the whole thing on hold. That's basically taking out most of the origination capabilities. So that's something which was done. We've always said that this business, and that's sort of the problematic part of the decision which we took now, is a contribution business also paying for systems, which we have anyway. We can't switch them off because of the rest of the business which sits there. But there will be optimization points, which we'll look into and we'll take care of. But it's not lavishly and usually that we sort of fork out a couple of double-digit million figures there.

Just out of curiosity, I mean if you were to manage to buy back all the covered bonds, I mean is there any estimates out there? How much that would cost you basically to completely offset that position?

Well, look, I mean 2 things first to that. I mean first of all, of course, we have to be prudent here. We are a big [ country's ] issuer. And first of all, the most important statement is, of course, for the mortgage covered bonds, the OC will stay in the required amount so that we keep the rating that we have now as I said, the public sector covered bond is not strategic. So we, I think, can make the onetime decision to say, okay, we've changed some elements of our strategy. We reallocate resources. And therefore, we put it to nonstrategic. Therefore, we reduce OC. But as I said, at the moment, there is no plan to buy back covered bonds in either of the 2 portfolios because of that. That is essentially not the plan right now.

I understand that's not the plan. But how costly would it be? I mean is there the theoretical chance actually to execute such a thing on the market or get rid of that? Or is it just impact?

Purely hypothetical question that you raised, the purely hypothetical answer is I don't think so in large proportions because, particularly in the upfront, have long-duration assets, which are predominantly non-Pfandbrief fund. So they are basically placed away. They are not liquid bearer bonds. And they're with individual, let's say, for example, insurance companies. And I think they are basically sitting on them for good. And it will be very difficult to address these bonds via normal means of tender offers, et cetera. So I think they are well placed, and they are sold for good.

Okay. So this optimization could take 15, 20 years basically on the liability side and assets side?

In the theoretical scenario that we would consider, which is currently not the case.

Good. Any other points? Any other questions?

We don't have any questions at the moment.

Okay. Then I get indications from the --- there's a question?

Sorry, there's a follow-up question. It comes from Mr. Thormann.

Yes. One question from my side. Could you specify the revenue contribution CAPVERIANT made this year?

Well, the CAPVERIANT contribution in terms of activities on the platform was much better than last year, I mean, '22 against '21. So on that side, we are quite satisfied in terms of actual transactions closed, still behind expectations. That is as much as we offer to that topic.

And how much will this business be impacted by the decision on basically the PIF rundown?

Well, it is basically sort of immune from that question because Public Investment Finance is the business on balance sheet. CAPVERIANT is a way the means of brokerage platform, which we did for brokerage platform reasons in order to see and to test what kind of financial instruments can actually be transacted on the platform business only without too much interference balance sheet-wise and world-wise from our side. So we are in the process of evaluation and see how that business model takes us forward and how much of that is needed in other cases and places, and then we will see a report in time to you what the results of that thinking will be.

And we have another follow-up question from Mr. Lukesch.

Yes. One more on the investment management section that you're just creating. So you said before, you're not currently planning to lend to these funds, but you might consider to do so in the future. I was just wondering, I mean in general, putting up this business, how much is that kind of competition to current customers? So do you think there's any potential negative impact on your current lending business? And with regards to a potential lending size, I mean let's assume that or ask differently, by how much do you think this portfolio could grow into '26? And given that size of the portfolio, what kind of potential lending ratio would you regard as possible?

Andreas Schenk will answer to that.

Okay. We will be very careful what we do in this respect. And at the moment, we are working very hard on the conflict-of-interest framework, which we will have in place before we do the first year where it's pretty clear in our bank who is concentrating on what kind of business. We don't expect that we have any impact on our main business and our lending business. Definitely not. And as we tried to explain earlier, there is definitely no lending ratio in our plan, which we have here because for the time being, we are not planning to do so. I just do not want to hold at a 100% out, but there is no intention for the time being. And as I said earlier, also in our plan, there is no lending activity for our funds.

But why are you not planning to lend to the funds? I mean I understand that you might go up a bit the risk potentially with the funds compared to your very conservative business approach otherwise. But I mean why don't you see that then as a business opportunity?

For us, it's just the question, as I mentioned, it's a conflict-of-interest question where we want to be very clear who is concentrating and bought. And mixing the business up is something we are not really looking for. I think there's a lot of synergies in the knowledge we have, in the market we are in. So we are very close to our DNA, to our commercial real estate DNA. So there's a big understanding in our company what we do here. But the conflict-of-interest management is something which is important, and therefore, that is not really planned as a significant part or at all going forward.

And maybe, Lukesch, one sort of more in principal observation to that. We were talking about balance sheet income and off-balance sheet income. And when we talk about funds business as much as we may talk about debt funds or originate to distribute, there might be situations where, due to market habit, we might be forced to take an equity stake in the instrument. But that's not strategic in a way that we want to pursue that in order to flatten our portfolio, it is more as something which we might have to do in order to get the thing floating. So it's a very clear orientation towards this is an off-balance sheet business, and we want to drive it this way, and the rest remains to be seen. I mean now we're working on the first product to bring -- to be brought to market, and then we'll see from there. Lukesch, are you okay?

Yes.

Good. Any other questions? No?

We didn't receive any further questions.

Good. Then I have to say thank you very much. I'm sure that the topics which we presented today will keep us busy and keep us in discussion over the next quarters to come. If you have any further questions and points which you want to elaborate on, we and the Investor Relations team is happy to take your calls and to enter into a conversation in order to give further clarifications. Thank you very much for participating today and for dialing in. Stay healthy. All the best, and thank you for joining. Thank you. Bye-bye.