Deutsche Pfandbriefbank AG (PBB) Earnings Call Transcript & Summary

Ladies and gentlemen, a very warm welcome to our analyst call. Together with my colleague, our CFO, Marcus Schulte, I will take you through the preliminary facts and figures for the financial year 2024. As usual, that is based on the IFRS figures for pbb Group. As always, there will be plenty of time after that for your questions, and we are looking forward to those. Ladies and gentlemen, 2024 was a challenging, eventful and sometimes turbulent year. At the end of it, though, we look at a successful year for Deutsche Pfandbriefbank. Certainly, the market environment has been difficult. One can see that looking at our own commercial real estate index, pbbIX, that we published on the 20th of February. Although markets clearly show that they have reached a bottom, there are equally only minor signs of a short-term full market recovery. Despite these market conditions, we remain focused and delivered on our key targets. We ended 2024 with a significantly improved profit and lower risk costs. At the same time, we continued to invest in the efficiency and effectiveness of our business model and started to systematically execute on our Strategy 2027. 2024 was also a year of contrast. For me personally, it was my first year as CEO at pbb. And to already preempt the potential question, I really enjoy working here. Facing the multiple challenges and staying focused on driving the firm's transformation, there is a lot to do. The pbb team and I are eager and committed to getting it done. Our goal is crystal clear: to make pbb the platform of choice for commercial real estate. This journey has just started. After the major challenges we faced in Q1 2024, we successfully regained trust in the market over the course of the following 9 months. We were able to demonstrate that pbb is a healthy and resilient bank that can successfully withstand the cyclical nature of our business. We delivered on our guidance. Our profit before tax rose by more than 15% to EUR 104 million, a respectable result in a turbulent year for commercial real estate markets with historically low transaction activity. We delivered an operating income of EUR 544 million, reaching the upper end of our guidance. At the same time, risk costs are down by around 20% to minus EUR 170 million. Despite this progress, they ended up at an elevated level that we are not satisfied with. It is worth noting though that the risk cost reduction accelerated in the second half of 2024, down 35% compared to the first half of the year. This is in line with CRE markets bottoming out and an important step towards greater stability. However, given the current broader geopolitical dynamics and Europe's challenges around economic growth, there is a wide range of possible scenarios, making predictability very difficult, if not impossible. 2024 was also a year of investment in pbb's future. We made targeted investments into the digital transformation of key processes in our core bank and in our IT infrastructure. In addition, we continue to invest in the diversification of our business model. Despite all these important investments, we remain focused on stringent cost management. Our general and administrative expenses are down by nearly 4% year-over-year to EUR 245 million. With a cost/income ratio of 49%, we came in even slightly better than originally planned. The strong performance on cost shows that we remain committed and fully on track to reach our midterm target of below 45%. We started to execute on Strategy 2027. At EUR 5.1 billion and short of full year expectations, our new business volume in 2024, including extensions larger than 1 year, was selective. Reason is that we already focus more on profitability and return on invested capital, two key pillars of our Strategy 2027. We targeted financing transactions that generate higher margins, strengthening our risk return profile. This is reflected in a strong increase of our gross interest margin in our new real estate finance business from 205 basis points to 240 basis points. At the same time, we had a strong fourth quarter with a new business volume of EUR 2.6 billion at those higher margins. In line with Strategy 2027, we also started a more proactive management of our core and noncore balance sheet. Through asset sales and liability buybacks, we reduced the balance sheet by EUR 6.7 billion. The real estate finance portfolio reached our strategic target volume of EUR 29 billion. We were able to make first improvements of our return on tangible equity before taxes that improved to 2.7% in 2024, up from 2.3% the year before. On the capital side, the successful transition to the Foundation Internal Ratings Based Approach, F-IRBA, for the majority of the real estate portfolio was an important milestone for pbb in 2024. The pro forma CET1 ratio in accordance with the new F-IRBA Basel IV regulations, which have been enforced since January, was 16.8% as of the 31st of December 2024. Under the Basel regime still in force at the end of the year using standardized parameters, the CET1 ratio was 14.4%. With this strong capital ratio, we are almost EUR 1 billion above the regulatory requirement and remain well capitalized. Ladies and gentlemen, this progress allows us to return to capital distribution. We are very happy that we are able to let our shareholders participate in the improvements that we made. In line with our new capital distribution policy, we will propose a dividend of EUR 0.15 per share for the fiscal year 2024. In addition, and for the first time in history of the bank, we will return capital via a share buyback program. Subject to required regulatory approval, a process that we have already started, the program for 2025 will have a volume of EUR 15 million. The combination of the proposed cash dividend and the planned share buyback program will distribute around 55% of our distributable income. And with that, I would now like to hand over to Marcus Schulte, who will now take you through the figures for the financial year 2024 in much more detail. Marcus, over to you.

Thank you very much, Kay, and good morning also from my side. As Kay said, 2024 was undoubtedly a particularly challenging year on the one hand, with respect to real estate markets, but also for the bank itself in terms of capital markets dynamics and capital transition. Today, we can say, as Kay said, we managed these challenges and delivered what we promised. With that, let me start with an overview of the key financials development on 2024 on Slides 5 and 6. The selective and profitability-focused approach to new business and lower transaction activity in the overall market led to a decline in the new business volume to EUR 5.1 billion after EUR 7.2 billion in 2023. Whilst we were able to generate strong new business volume of EUR 2.6 billion in the fourth quarter, new business is, therefore, also below our EUR 6 billion to EUR 7 billion expectation at the beginning of 2024. As you know, at pbb, new business is including extensions above 1 year. On the flip side, the average gross interest margin in new business rose significantly by around 35 basis points from 205 basis points in '23 to around 240 basis points. The increase also reflects our stronger focus on higher profitability in our core business, which we communicated as part of Strategy 2027. Let me say that we were able to maintain this higher margin level throughout the entire year. The REF portfolio decreased by a total volume of EUR 2.1 billion and was therefore below our initial expectation of around EUR 30 billion to EUR 31 billion. With EUR 29 billion, it converged already to our Strategic 2027 target level. In addition to a selective new business, this is also due to the portfolio sale of EUR 900 million in the second quarter of 2024, which contributed to capital management during the transition phase. In line with increasing gross interest margins, also the portfolio margin increased clearly. We remain on track to further optimize and reduce our noncore portfolio in an accelerated and value-raising manner. The reduction by EUR 2.7 billion to EUR 9.7 billion at the end of 2024 includes asset sales of EUR 1.9 billion, EUR 900 million of which in Q4. At the same time, we bought back liabilities of EUR 900 million. Both contributed importantly to realization income. Retail deposits proved to be very flexible and cost-efficient source of funding. Year-over-year, retail deposits rose by EUR 1 billion to EUR 7.6 billion at year end. After having peaked at more than EUR 8 billion in the first half of the year, we managed the volume down to needs, i.e., close to the envisaged circa EUR 7.5 billion. I'm moving to Slide 6. With EUR 554 million, operating income reached the upper end of our guidance of EUR 525 million to EUR 550 million. That said, operating income was down EUR 59 million year-over-year, which has to be seen in the context of a similar amount of one-off income in 2023. NII was impacted by our selective approach to business and our strategic focus on active balance sheet and capital management. By freeing up inefficiently deployed capital through our portfolio transaction and noncore sales, we temporarily sacrificed NII. Looking at operating costs, we were able to beat our guidance despite ongoing investment activities. General and administrative expenses fell by EUR 4 million to EUR 245 million. Strict cost discipline overcompensated both inflation-related pressures and investment costs. At 49%, our cost/income ratio came in below the guided around 50% despite the falling top line. Overall, total expenses, including write-downs and bank levies, were down by EUR 31 million, significantly compensating for the fall in operating income. The significant reduction in risk provision of around 20% is clearly another positive. It fell from minus EUR 212 million in 2023 to minus EUR 170 million, even though it remained, as Kay said, on an elevated level as expected. Particularly noteworthy is the significant improvement in momentum over the course of '24. Risk provisions in the second half fell by a substantial 35% compared to the first half. In summary, we delivered despite a challenging market environment. Pretax profit rose significantly by more than 15% from EUR 90 million in the previous year to EUR 104 million in 2023 -- 2024, which is in line with our guidance. Let me now come to the first deep dive on operating income on Page 7. It has to be said that we saw a decrease in net interest and commission income by EUR 15 million to EUR 470 million. But this is to be seen as a transition to a more profitable portfolio going forward. The decline in the portfolio volume in the context of our active balance sheet manage and selective new business as well as an increase in refinancing costs had a dragging effect, particularly in the second half of the year. The higher portfolio margin only partially compensated for this. That said, most of the total operating income drop of EUR 59 million is explained by EUR 55 million one-off income that had benefited 2023. Let me explain. Realization income came in strong, decreasing a moderate EUR 6 million to EUR 79 million, where 2023 had benefited from one-offs of EUR 24 million from a legacy securitization. Other income generally balances out over time and was at minus EUR 5 million in 2024. This compares to EUR 33 million in 2023, which had been driven by one-offs of EUR 31 million from the release of provisions. Summing it up, the top line drop of EUR 59 million was partially compensated by a EUR 31 million reduction in overall costs. Accordingly, profit before risk provisioning fell by EUR 28 million year-over-year to EUR 274 million. However, considering aforementioned EUR 55 million one-off income benefiting 2023, and the EUR 21 million lower bank levy in 2024, profit before risk provisioning adjusted for these one-off effects actually increased by EUR 6 million. On Slide 8, you find a deep dive on operating expenses. As a result of our strict cost discipline, operating expenses were down by EUR 10 million or 4% to EUR 266 million, thus outperforming our own expectations and in effect, our guidance. All operating cost lines, personnel, nonpersonnel and write-downs are down year-over-year. Our nonpersonnel expenses and write-downs are down year-over-year despite the fact that we have made significant investments in our IT infrastructure and digitalization of our credit decision process. Our new IT infrastructure is now in place. And out of that, we expect significant cost savings from here on. Despite inflationary cost pressure, also personnel expenses are down as we have delivered on FTE efficiencies on the back of a more digitalized credit decision process. We are well advanced on previously communicated cost measures, which had included an FTE reduction of 15%. More than 3/4 of that has already been implemented by year-end 2024. We will continue executing on existing and implementing new cost measures and expect to bring the cost/income ratio of the on-balance sheet business, which is the REF and noncore business, down toward our target level of 45% by the end of '25 already. That said, diversifying our business into real estate investment solutions requires investments. These will largely be financed by the aforementioned cost savings, meaning that we expect the cost/income ratio for the bank to remain roughly at last year's guidance of around 50% in 2025. Investments are then expected to pay off from '26 onwards. With rising commission income from the REF business segment, the cost/income ratio for the bank as a whole is then expected to fall to below 45% by end of 2027 as was guided at our Capital Markets Day. With that, I come now to risk costs on Slide 9, the next deep dive. At minus EUR 170 million, risk provisioning for '24 was significantly lower than previous year figure of minus EUR 212 million, a decrease of 20%. If we compare first and second half of '24, risk costs actually fell by 35%, as mentioned. This development is in line with what we had guided. For 2024, risk provisioning splits up as follows: In Stage 1 and 2, there was a net release of EUR 14 million, whereby the management overlay of EUR 31 million built for U.S. risk was fully released as risks materialized in Stage 3. Main counter-vening effects were PD/LGD movements, even though also that dynamic was clearly reduced from 2023. Stage 3 risk provisions totaled minus EUR 184 million and were significantly down from the minus EUR 211 million in 2023. As you know, and as you can see in the pie charts, the main drivers were and continue to be office property signings in the U.S. and development financings in Germany. In the fourth quarter, risk provisioning fell again by EUR 7 million or 19% to minus EUR 30 million. The decrease in Stage 3 risk provision was even more pronounced in the fourth quarter, falling by EUR 34 million or 58% quarter-over-quarter. Of the minus EUR 30 million in the fourth quarter, minus EUR 5 million was attributable to Stages 1 and 2, mainly due to credit-induced effects. The bottoming out of property market is also reflected in the risk models, particularly taking account the latest individual trends at the respective market segments. Stage 3 accounted for minus EUR 25 million, a net minus of EUR 20 million attributable to U.S. office and minus EUR 4 million to an existing developed NPL in Germany. On the next slide, Page 10, we look at the stock of risk provisions on balance sheet. In 2024, the total amount of loss allowances fell by EUR 46 million from EUR 589 million to EUR 543 million, mainly driven by a reduction in Stages 1 and 2, but also slightly down in Stage 3. The net reduction in Stages 1 and 2 of EUR 43 million year-over-year predominantly reflects the aforementioned net income of EUR 14 million from Stages 1 and 2 for the year, plus migration to Stage 3 and consumption. In the fourth quarter, we actually saw a net increase of EUR 9 million in Stages 1 and 2, mainly driven by quarterly net income of minus EUR 5 million, as mentioned, and FX effects. In Stage 3, there was a net decrease of EUR 3 million year-over-year to EUR 411 million. Gross additions mainly for U.S. office financings and German developments have been slightly overcompensated by releases due to successful restructurings and repayments resulting from our active NPL management. This trend manifested itself in the fourth quarter, where we recorded a net decrease of loan loss allowances by EUR 34 million from the 9-month peak. Before I go into the usual details of the portfolio, let me elaborate on a few overarching developments on Slide 12. Our focus on profitability, balance sheet and risk management has led to a significant reduction of 12% of the portfolio, particularly driven by U.S. and German development portfolios. Also, as markets bottom out, the risk parameters in our performing portfolio are now better than a year ago. Whilst higher than a year ago, the average LTV has stabilized at 56% for the overall portfolio in the second half of the year and even slightly falling from 70% to 69% in the U.S. office portfolio in the fourth quarter. The momentum in valuation adjustment has also improved on a 12-month rolling basis. A gradual improvement has been evident in second half 2024 in the overall performing portfolio. In the U.S. office portfolio, valuation adjustments on a 12-month rolling basis improved significantly in the fourth quarter. Let us now take a look at the point-in-time risk parameters in our performing REF portfolio, which are underlining, as I believe, our strong position as a senior lender. I'm on Slide 13 now. Our average LTV shows a solid 56%, which was stable quarter-over-quarter. Looking at the layered LTV, for example, 87% of the committed investment loans still have an LTV of less than 50%. At around EUR 614 million, the exposure at risk, i.e., exposure in the over 70% layered LTV range was slightly above the 9 months level of around EUR 540 million, but remains manageable, considering that a further 30% stress on current valuation seems very onerous. Moving to Slide 14 on the NPL. The NPL portfolio increased by EUR 387 million to EUR 1.9 billion at the end of 2024. However, economically adjusted NPLs were up less by EUR 187 million to EUR 1.7 billion. For the year, there were 13 new additions and 15 reductions, including 3 cases, which are economically yield, but which has still to transform into a reduction of regulatory NPLs. In the fourth quarter, we had four new additions of EUR 245 million, 3 U.S. office property findings and 1 development financing in Germany. These additions, however, came with only marginal Stage 3 provisioning of EUR 3 million. At the same time, we continued our active NPL management in Q4 and can thus report 5 economically yield NPL of a total of EUR 228 million, 4 U.S. loans and 1 legacy German residential loan. As already mentioned, these 5 yield loans include 3 restructured U.S. office property financings of EUR 200 million, which cannot yet be recognized as regulatory NPL reductions. The deduction from regulatory NPLs for these 3 loans is expected after the cure period at the end of 2025. We will keep a strict focus on our NPL management. Looking at potential additions and exits from here, we expect a clear reduction of regulatory NPL volume towards the end of 2025. That said, a temporary increase during the year cannot entirely be ruled out. Let's briefly move to the U.S. to the extent of what I haven't said, I'm on Slide 15 now. In addition to my earlier comments on the moderating dynamics in the performing U.S. portfolio, let me just say the following. In line with the slightly improved average LTV of 69%, the exposure at risk in the U.S. portfolio was only marginally up from the 9 months level by EUR 12 million to EUR 178 million, again, a clearly decreasing dynamic compared to what we had observed in the third quarter. Further to what I already said on NPL overview overall, just a few words on the U.S. specific NPL on Slide 16. Regulatory NPL increased to EUR 878 million per year-end. When taking into account the aforementioned three economically healed loans, we had 10 new additions and 10 reductions in 2024 with only a moderate increase of economically-adjusted NPL to EUR 678 million. On a quarterly basis, NPL in the U.S. were still up in Q4, but considering the three loans, the economically adjusted NPL actually came slightly down from the 9 months level. This brings me to the next portfolio and focus, the development portfolio. Even though adding another development financing to the NPL portfolio in the fourth quarter without Stage 3 loan loss provision, also this portfolio shows clearly positive development. This portfolio has been downsized most, i.e., by more than 30%, down to EUR 2.2 billion at year-end. A total of 23 project development findings were repaid or converted into investment loans. However, we also financed for new project developments totaling EUR 101 million. This type of product will continue to be part of our financing offering in the future, but on a selective basis with a smaller portfolio share than historically. In addition to the EUR 1 billion outright reduction of the portfolio, we have a clear shift from construction into the finishing phase, which also significantly derisked the development portfolio. NPLs for the year increased by EUR 271 million to EUR 653 million. We recorded 3 new additions, 2 land phase cases, 1 German office construction case that I mentioned in the fourth quarter. However, all of them with no additional Stage 3 provisioning. One land case had been repaid in the third quarter. All remaining 8 development NPL cases in the development book are in good German inner city locations. The bulk of Stage 3 loan loss provisions remains allocated to the 2 German development loans previously mentioned, with a EUR 4 million addition still occurring in Q4. The German portfolio, I'm on Slide 18, still accounts for 45% of the REF portfolio, remaining overall solid with an almost unchanged LTV of 56%. We do not have any nonperforming investment financing in the Germany. NPLs in Germany are limited to the aforementioned development NPLs. With that, I would move to the other side of the balance sheet. I'm now talking to Pages 20 to 22, not flipping pages. With our resilient and balanced funding mix, we successfully navigated through difficult market phases, showing ample liquidity at all times with more than EUR 6 billion liquidity that also applied at year-end. In the past financial year, the volume of new long-term wholesale funding totaled EUR 2.5 billion after EUR 3.3 billion in the previous year. The reduction is driven by prefunding in '23 and lower balance sheet needs in '24, especially the Pfandbriefe product proved to be highly resilient as we continuously issued through the entire year with a total volume of over EUR 2 billion at year-end. In a challenging 2024, we were also able to issue a EUR 500 million green senior preferred benchmark. The second strong pillar of our unsecured funding are retail deposits, which are cost efficient and can be effectively scaled to needs. As mentioned, year-over-year retail deposits rose by EUR 1 billion to EUR 7.6 billion at year-end, and we have managed them after the peak of EUR 8 billion to the envisaged EUR 7.5 billion per year-end. Looking at '25, we already issued a highly successful benchmark with a volume of EUR 750 million in January, which actually had the highest oversubscription we ever recorded. By now, we already covered more than half of our full year requirement of EUR 2 billion in Pfandbriefe. In terms of wholesale unsecured funding, we aim to remain a regular player in the market with one issue per year. I'm now moving to capital before I hand over to Kay. I'm on Slide 24. An important milestone, as you know, was the approval and switch to the Basel IV Foundation Internal Ratings Based Approach, F-IRBA, from the 1st of January 2025 onwards. Since the beginning of the year, we are using F-IRBA as the approach for the main model and risk standard in the majority of the property portfolio. We have successfully managed and completed the H2 transition phase. In figures, this means based on transitional standard parameters, the CET1 ratio was at 14.4% at the end of the year and the pro forma CET1 ratio in accordance with F-IRBA Basel IV was at 16.8% of the end of 2024, slightly down from 17.3% in Q3, driven among other by PD movements and FX effects. The strong capitalization supports us in implementing the Strategy 2027, both in terms of diversifying our business model, but also in applying the communicated distribution strategy. That's it from my side. Thank you for your attention, and I hand back over to Kay.

Thank you, Marcus, for the details on a lot of numbers as we want to stay very transparent as we have started a year ago around our portfolios and the dynamics in there. Ladies and gentlemen, let me briefly summarize the most important points with regard to our financial year 2024 on Page 26. In a challenging environment, we delivered on our promises. We focused on active balance sheet management to free up resources tied in less profitable business activities, and we managed the capital transition into the foundation F-IRBA under the new Basel regime. Second, with Strategy 2027, we started our transformation to increase profitability. Third, we see the real estate markets bottoming out, which should provide stability and support our profitability. And fourth, we implement our new capital distribution policy so that our investors can benefit from this development. Let's have a quick snapshot on our markets on Page 27 and 28. You can see from the chart that the commercial real estate markets are bottoming out, and in line with this, risk dynamics in the portfolio are decreasing. In Europe, we see that spreads between prime property yields and interest rates start to widen again. Transaction activity is slowly picking up from very low levels. Similar dynamic can be seen in the U.S., where transaction volumes are also stabilizing from very low levels. On Page 28, let's have a look -- a brief look at the office markets. In Europe, we perceive the flattening of the curve in prime yields. Yields have most likely peaked at the end of 2024 and are expected to decrease moderately in the upcoming quarters, while rents are still expected to rise. High-quality supply constraints, as evidenced by vacancy rates of just 2.8% in Paris CBD or 1.5% in London for Grade A, will further widen vacancy spreads between prime and poor quality buildings. In the U.S., cap rates might come down even a bit faster. New demand for office space has nearly returned to pre-pandemic levels. Q4 leasing volumes reflected roughly 90% of typical pre-pandemic averages. Subsequently, combined with a weak supply pipeline, Q4 2024 marked the first decline in vacancy rates in more than 2 years. To summarize the situation in our core markets, we observed some more stability, but a more sustained recovery remains vulnerable and at best, will come at a slow pace, considering today's geopolitical and macroeconomic vulnerabilities. Ladies and gentlemen, in such an environment, the forward-looking guidance remains a challenge. If we turn to Page 29, it, however, remains our clear goal, we want to accelerate the transformation of pbb to become more profitable, diversified and cost efficient. We have a strong foundation. Now it is a matter of consistently executing on our Strategy 2027. To do this, we have a robust capitalization and a clear strategic direction. In 2025, new real estate finance business, including extensions larger than 1 year, should increase to between EUR 6.5 billion and EUR 7.5 billion. We expect the development of risk costs in the second half of 2024 to support a further reduction in 2025, a next step to more normalized cost of risk. Profit before tax is expected to increase further and to be significantly higher than in 2024. We are planning with an operating income between EUR 500 million to EUR 540. As far as our profitability on capital is concerned, we want to take a notable step forward to improve our return on tangible equity and target to achieve 3.5% to 4.5% before taxes. At the same time, we will continue to invest in our business model in order to increase commission income, to improve efficiency and to lower our cost in our core business. With that, I say thank you very much for your attention. Marcus and I are now looking forward to your questions.

[Operator Instructions] So the first question comes from Borja Ramirez, Citi.

I have two. Firstly, on the distribution, which was a positive surprise for the market. I would like to ask what have been your discussions with the ECB, especially with regards to the share buyback? And then my second question would be linked to the nonperforming loans. I would like to ask, firstly, this EUR 200 million of restructured loans that are still under regulatory scrutiny until December 2025, what is that? And also if you could share any details on the future evolution of NPLs?

Yes, Mr. Ramirez, thanks very much for your questions. And let me take it in reverse order and start with your question on NPLs. You have seen that we, with literally the 7th of March last year, have started to provide a high level of granularity around the development of our NPL portfolio and deliberately always showed what goes in new and what goes out and out goes either by -- it is a restructured loan. And if it is restructured, it stays on our books or it is repaid. We always have been transparent. And the restructurings that we did so far until the end of Q3 always were in a way that from a regulatory perspective, they are no longer to be recorded as NPLs. However, depending on the respective structures, you can heal a transaction, i.e., restructure the transaction with the borrower, but you still need to record that for at least 12 months, a so-called probation period until it's finally healed from a regulatory standpoint and then is allowed to leave the NPL. However, from our perspective, we wanted to provide the transparency that in this book, in the fourth quarter, we have 3 transactions that have been completely restructured. So the transactions are standing on new terms and new footings. And therefore, economically, we do not regard that as NPLs anymore. However, and that's where we also are transparent, they are in a 12-month probation period. So therefore, from an NPL and NPL ratio perspective, regulatorily, they remain in NPL. Economically, they are restructured and currently performing as we have expected to perform them in the same way as we reported restructured transactions that are no longer needed to be recorded from a regulatory standpoint under NPL. We wanted to provide that transparency as it has been our clear focus to work on NPL, and we have continued to do so in the fourth quarter, and we will continue to do so in 2025. And there is a clear dynamic that we expect in 2025 that there are more transactions leaving our NPL books and get restructured than entering new ones. So that's a clear expectation and extending a little bit in my answer with a forward-looking perspective for NPLs. But this is a bit a lengthy answer, but to give more perspective on why we have started in the fourth quarter to add this column and differentiate between regulatory NPL volumes and economically NPL volumes. With regard to your first question, I can definitely give a shorter answer. We are in good exchange with the ECB, by the way, as always. And there is a normal process around the share buyback program, and we have started a process with ECB to gain approval. So therefore, we have been clear in saying it's subject to the approval, but I can also confirm that we are in very good exchange with the ECB, as always, on a regular basis.

[Operator Instructions] We have here another question from [ Shahnawaz Binji ].

I have a question on the realization income, which is now kind of becoming sort of a permanent feature in your P&L. Could you perhaps give us a bit of guidance on what you expect on realization income this year, also perhaps maybe from a liability management exercise. I still see, for example, a couple of bonds, which are trading well below par. So any color on that would be appreciated?

Yes. Look, thanks for your question. I mean, as you know and as I have said, the history in '24 was pretty much balancing, as you can see, the composition income from asset sales, EUR 1.9 billion notional and respective buybacks, EUR 900 million notional. The fell here is that typically, we sell noncore assets which are noncore and make no sense for us anymore. And we buy back the respective public sector or covered bonds on the other side. And there is, in these cases, a gain on both sides contributing to the figures that you see where you see a net income of EUR 38 million from the sales and EUR 35 million from the buybacks. Now I think as we normalize with the cycle, we would expect that the income from these sort of effects will gradually come down even though there are, of course, still opportunities to look at. And in all parts of the liability side, public sector covered bonds, senior, which we regularly also address when it loses its value, but also capital management, so in all areas, there is opportunities. That is also the case on the asset side. But that said, with the cycle normalizing and interest rates normalizing, we expect that an increasing part of realization income will actually come from the normal real estate business where people repay on positive news that we have seen in the past. So we see that gradually, over time, as the cycle normalizes, there's a more balance between noncore sales and buybacks on the one hand and prepayments on the REF portfolio on the other. I think generally speaking, you should expect a normalization of realization income over time, slightly down from here.

And when you say that you expect more [indiscernible], obviously, you are working with higher margins on REF business right now. Would that be the key driver behind these prepayments? Or is there anything else going on?

No, I would answer that. I think it's a typical cycle that we know that if real estate markets see a higher transaction volume, that translates into a faster turnover of our loans on the book, because transactions are happening, people sell their assets and we get the loan repaid, hopefully get the new financing in. And this turnover of getting the loan repaid most likely earlier than what the contractual agreement is, has been in the past always generating additional income for us. And that is what we expect and when Marcus said in a normalizing market that there will be more income coming from that side, with lower transaction volume, you have lower turnover. So it's a correspondent effect that we know in our business and is literally part of our real estate finance activities.

And the next question comes from [ Corinne Cunningham ].

I've got three, please. First one, just on the Tier 2 refinancing. These two bonds are obviously amortizing from a regulatory perspective. What are your plans there? And if you don't plan anything in the immediate future, should we literally just think about this at maturity? Or is there an opportunity to do something ahead of time? Second one is on the LTV developments. How much of that would you say is just an automatic effect from falling interest rates? And is there a more sticky part of the portfolio where maybe LTVs are increasing? And then lastly, if you can give us an update on the new joint venture, anything that there is to give us there in terms of how that's going?

Thanks, Corinne. Thanks for being on, and thanks for the questions. So look, on the Tier 2, I think we are rational people, and we, of course, do see the nature of these amortizations on the one hand. On the other hand, you know that we are now in the F-IRBA world, as I explained, and that, of course, with 16.8% CET1 ratio, we are in a reasonably comfortable capital position. And of course, that also applies for own funds. Having said that, we always made a point in the bank to have an efficient capital structure as well because efficient capital structure enables strategic flexibility. And therefore, it is, of course, the consideration if and when markets give the opportunity to renovate, if I may say, that these legacy instruments to get them back to full regulatory content. But as I said, we are under no time pressure there because going in with the F-IRBA, we are on a comfortable level. And of course, we are also thinking of NII and income in general. So the answer is capital management at the right time.

And I would take your two other questions. First around the LTV development. And you link your question to interest rates. And of course, in general, rates do drive values of properties. There's no doubt about it. But if you look in particular on the fourth quarter, you could have seen that in the U.S. and in the U.K., rates have been quite up what's trending when you take the 5-year rates from the end of September. So in the fourth quarter, there was quite a dynamic on the rate side. And when it comes down to the LTVs and looking on our U.S. book, you even see a slight reduction on our performing book with regard to the LTV. So there is an additional underlying dynamic that is besides rates that move and fluctuate at the short end, and that is the economic development that we see. That's why looking at bottoming out of the markets that I was talking about, take the U.S. as an example, fourth quarter being the first one where vacancy rates in the office markets are down for nearly 2 years. We see that, and this is stabilizing on the LTVs, next to rather fluctuating and dynamics that we monitor very closely on the rate side, given what I would say reflects the more geopolitical and overall macroeconomic environment and to a lesser degree, the real estate market environment at this point in time. And to your last question on our joint venture, we are progressing pretty well. We are very -- by the way, close touch with also more nonbank financial institutions and investors looking into opportunities working together in our originate and cooperate business. So that is progressing well. I think I would take it that we are working on more concrete transactions and structures to see where we can come together. And that is, from our perspective, progressing pretty well.

There are no further questions. Back to Deutsche Pfandbriefbank for the closing remarks.

Yes. Thank you very much. I take that on the point that Marcus did a fantastic job in deep diving on to the numbers. From my perspective, thanks very much for joining. Thank you for your questions. And as always, if there are more questions coming up afterwards, you know how to connect with our Investor Relations people with Michael and Axel, in particular. So you do not hesitate to reach out to them. And we are looking forward working together with you and wish you a good day.

Thank you very much.