Deutsche Pfandbriefbank AG (PBB) Earnings Call Transcript & Summary

Yes. Thank you very much, and a warm welcome, ladies and gentlemen, from my side to our analyst call on PBB's first quarter 2026 results. We are happy that you have once again taken the time joining us in examining our quarterly results in more detail. As usual, my colleague, Marcus Schulte, our CFO, and I are here to guide you through the bank's key developments and IFRS figures. As always, there will be plenty of time for your questions at the end of the session. Ladies and gentlemen, the changes we made to the structure of our Q1 report is a reflection and a testament of the strategic transformation of pbb, which we are consistently executing. For the first time, the bank is reporting on 2 distinct business segments, real estate investment -- Real Estate Finance solutions, which encompasses our core business of Commercial Real Estate Finance and Real Estate Investment Solutions, which includes the fee-based business of pbb invest, including the first time fully consolidated Deutsche Investment Group as well as originate and cooperate. In the third segment, the Corporate Center, we report on results that cannot be clearly attributed to the business segments, for example, from our investment portfolio managed by treasury and other activities. Our real estate finance solutions. We were able again to significantly increase new business volume in the first quarter to EUR 1.3 billion by almost 1/5 compared to the same period last year. Our key metric for profitability, return on tangible equity stands at 7%. At the same time, we made progress in reducing nonperforming loans, including a reduction of nearly 1/3 in our U.S. portfolio. For the first time, real estate investment solution is fully contributing to the bank's operating income with EUR 11 million from pbb invest and Originate and Cooperate. This puts us well on track for the rest of the year to achieve our target of a share of approximately 10% of the bank's total operating income. At the end of the first quarter, we reported a pre-tax profit of EUR 6 million. This is in line with our guidance for the full year. As expected, it reflects the costs associated with the significant risk transfer transaction related to our exit from the U.S. portfolio. In addition, the real estate finance portfolio and the non-core portion of the investment portfolio has continued to decline, driven by our risk reduction efforts, while for the first time, consolidation of Deutsche Investment has had a positive impact. Administrative expenses remained stable compared with the previous quarter. The rise in costs in our Real Estate Investment Solutions segment resulting from the first-time integration of Deutsche Investment was fully compensated by cost savings, particularly in our Real Estate Finance business. Liquidity remains at a comfortable level of EUR 4.8 billion. The CET1 ratio stood at 13.4% at the end of Q1 and is in line with the bank's previous guidance. The decline from 14.7% at year-end 2025 is primarily caused by regulatory adjustments on LGD treatment for the U.S. portfolio under the F-IRBA regime. More than 50% of the bank's covered funding requirements had already been met by the end of Q1 without any further substantial need for unsecured funding. The market environment in which we are systematically implementing our strategic transformation remains volatile and difficult to predict. However, thanks to a good start into the second quarter of 2026, we remain confident that we will achieve our targets for the full year. Let us, therefore, take a look at the real estate markets and the current geopolitical and macroeconomic environment on Page 5. You are no doubt monitoring geopolitical developments just as closely as we are. When we spoke to you about 2 months ago regarding our full year results, the conflict in the Middle East just started. At that time, many market participants were still assuming it would be a freeze intervention. It is obvious today simply looking through the situation and leaving forecast for economic indicators nearly unchanged is no longer an option. The future course remains uncertain as of today. And even before the war in the Middle East, the real estate markets were recovering rather sluggish. What is certain by now is that this new conflict will dampen growth and rather fuel inflation. Oil and gas prices have already risen significantly and with them, inflation in Europe. European real estate markets were still on a moderate recovery path in the first quarter. Further growth remains possible, but has become more uncertain. As investors were already cautious within the last month, even more projects could be paused or even suspended. If you look on Page 6 at the forecast from ECBs and many other institutions, we see a clear trend. Growth expectations are being scaled down, whilst inflation is expected to rise. Before the conflict in the Middle East, interest rate cuts have been the general expectation. For now, ECB is obviously waiting to see how the situation develops. However, especially because of the sharp rise in energy prices, interest rate hikes have also become more likely. Looking at transaction volumes in Europe, there was still slight growth in the first quarter compared to the previous year. However, the flight to quality continues and it's primarily to the so-called bets and chest, i.e., logistics, hotel and residential property types that are benefiting. Two months ago, we had already anticipated a rather sluggish recovery in the real estate market this year. As things stand today, the outlook has certainly not improved. Ladies and gentlemen, on Page 7, let me now turn to our Real Estate Finance Solutions segment, our core business in Commercial Real Estate Finance to show how we are performing in this market environment. As I mentioned earlier, we were able to increase our new business volume significantly by 18% to EUR 1.3 billion. This is a trend we have now been able to maintain for the third year in a row. The growing proportion of new commitments is also encouraging. They have risen from 42% in 2025 to 65% (sic) [ 64% ] in the first quarter of 2026. The same applies to our transaction pipeline, which we were able to further expand despite challenging market conditions. It grew by 17% to EUR 12 billion with an increasing share of property types such as hotels, student housing and senior living, which are of great importance to our Real Estate Finance Solutions strategy. In a highly competitive market environment, margins on new business remained stable at good levels of around 220 basis points. With an RoTE on new business of around 7%, we remain on track to improve the profitability of our portfolio. Despite the very strong performance of new business, we were not able to stabilize the Real Estate Finance portfolio in the first quarter. As part of our derisking strategy and due to repayments, it declined slightly once again from EUR 27.3 billion to EUR 26.8 billion. However, we were able to slow the pace of the decline by further increasing the profitability of the entire portfolio. Before I move on to the Real Estate Investment Solutions segment, I would like to briefly give you an update on the progress of our exit from the U.S. markets, moving to Page 8. We are making good progress in reducing our U.S. portfolio. In the first quarter, performing loan and 4 nonperforming loans with a total volume of approximately EUR 300 million were repaid. We are particularly encouraged by the strong progress made in reducing our NPL portfolio, which we were able to cut by nearly 1/3 from EUR 900 million to EUR 600 million. We are very confident that we will achieve our 2026 reduction targets of approximately 50% as early as the first half of this year. As expected, the portfolio secured by the SRT transaction remains unchanged. Due to the movement of the dollar at the end of the first quarter, there has been a slight increase in the portfolio by roughly EUR 100 million. Finally, on Slide 9, I would like to discuss our second business segment, Real Estate Investment Solutions before Marcus Schulte then take you through our financial figures on the quarter in way more detail. Real Estate Investment Solutions contributed EUR 11 million in revenues in the first quarter. Adjusting for purchase price and integration costs, the quarterly pre-tax profit amounts to approximately EUR 1 million. Compared to the same period last time -- last year, this is an improvement of approximately EUR 4 million. In line with our strategic transformation, this contribution is capital efficient and does not tie up any significant risk-weighted assets. For pbb invest in which the bank combines its investment management activities, fee income of around EUR 8 million was generated in the first quarter. Deutsche Investment was fully consolidated at the start of the year and is now making a significant contribution to the segment. Originate and Cooperate is contributing operating income of EUR 3 million. This includes income from syndication, loan origination and service fees. And with that, I'm more than happy to hand over to our CFO, Marcus Schulte, who will lead you through in way more detail to our figures.

Yes. Good morning, and welcome also from my side. Thank you, Kay. As usual, I will now guide you through financials, portfolio development, capital and funding. Together with the introduction of our new segment reporting...

We are back in the conference. We had minor technical issues. I hand back to Deutsche Pfandbriefbank.

Yes. Hello, ladies and gentlemen, sorry for that. I don't know why we dropped out on that end of the provider on our end. I'm not sure where you lost me, but essentially, I was just saying we redesigned the presentation, and we will, of course, provide you especially granularity on the new segments. And I was just starting to lay out the key highlights of the group financials on Slide 11, which you also see in a slightly new design. The PBT of EUR 6 million for the first quarter is in line with our expectations and is driven by 3 high-level developments that's, I think, where you lost me, which is #1, operating income that is affected by the envisaged SRT costs, but also by a rather accounting-specific effect that I will again explain in quite some detail in a second. The operating cost base is stable quarter-over-quarter despite the integration of Deutsche Investment and risk costs are substantially down following our significant derisking in 2025. Let me peel that onion for you, starting with some detail on the development in operating income. Purely on the face of it, operating income is down by EUR 29 million quarter-over-quarter from EUR 106 million to EUR 77 million due to several effects, not least on lower NII only being partly compensated by strongly increased fee income, slightly lower realization income as well as a negative fair value result in detail. NII is down EUR 15 million quarter-over-quarter, burdened by additional SRT costs of minus EUR 10 million as envisaged. But beyond that, NII is down another EUR 5 million because the reduced portfolio volume in REIS and noncore could not be fully compensated by further increased REIS portfolio profitability and lower funding costs. At the same time, fee income increased strongly by EUR 10 million from REIS, as mentioned by Kay, which is mainly reflecting the integration of Deutsche Investment in the first quarter. Allow me to explain that fee income is reflected in 2 accounting lines. On the one hand, EUR 5 million net fee and commission income, which is coming from Deutsche Investments Asset Management and O&C. On the other hand, EUR 5 million in net other operating income, which contains the property and facility management income of Deutsche Investment. In line with our strategic targets, we bundled fees from these 2 accounting lines in the table you see to fee income. You can find further details on the exact derivation of these figures in the appendix and in our segment reporting. Looking then at the combined NII and fee income in the walk on the bottom left, this is only moderately down by EUR 5 million from EUR 99 million in the fourth quarter to EUR 94 million in the first quarter 2026. So in a nutshell, the drop in NII from SRT costs and portfolio reductions by EUR 15 million could not be fully compensated by a positive jump in fee income that I explained by EUR 10 million. Realization income is down by EUR 5 million, while prepayments stayed rather stable, extraordinary income from liability buybacks and non-core asset sales was lower. The fair value result and others account for negative minus EUR 22 million, down EUR 19 million quarter-over-quarter. This is partly a reflection of the changed interest rate environment, but more importantly, down to credit-induced impact and includes minus EUR 10 million fair value risk charges for U.S. NPL, which, as you know, have to be reflected in the operating income even though they are rather risk costs from an economic point of view. To be clear, these U.S. fair value risk charges are more than compensated by EUR 11 million positive release of U.S. Stage 3 LLPs in the risk provisioning line that I will come back to later. Adjusting operating income for this U.S. fair value risk charge, it would be EUR 87 million, down EUR 19 million from EUR 106 million, most of which is then explained by the SRT costs. Moving on to costs in this overview. On a like-for-like basis, operating expenses are down quarter-over-quarter as a reflection of our cost discipline. Thus, we were able to keep operating expenses overall stable despite the integration of Deutsche Investment. As you can see, risk provisioning is substantially down to minus EUR 2 million following our significant derisking in '25. The additions in Stage 3 for European NPL are partly compensated by aforementioned releases in the U.S. as well as Stage 1 and 2. I will come back to that in the respective deep dive. Overall, PBT is therefore up EUR 21 million quarter-over-quarter. And is on the one hand, the result of moderately lower NII and fee income plus moderately lower realization income as well as specific effects in the fair value result, but is on the other hand, helped by stable operating costs and very significantly reduced risk costs. Importantly, PBT of EUR 6 million is in line with our expectations. With that, let me come to our first deep dive on Slide 12. Operating expenses, including depreciation, remained stable and well managed. We successfully reduced operating expenses in REIS and the overall bank operations by a combined EUR 6 million quarter-over-quarter. This is especially down to reduced IT and overall strategic consultancy costs. This saving is then fully compensated for the cost increase in rates stemming from the integration of Deutsche Investment. The elevated cost/income ratio of 88% is especially a reflection of the lower operating income level, which was also burdened by the aforementioned minus EUR 10 million U.S. fair value risk charge. Adjusting operating income for this U.S. fair value risk charge, the cost/income ratio would be 78%. This then brings me to the deep dive on risk provisioning on Slide 13. LLP are down to minus EUR 2 million, driven by a net release of EUR 7 million in Stages 1 and 2 and net additions of minus EUR 10 million in Stage 3 as well as modifications of EUR 1 million. Net release of EUR 7 million in Stage 1 and 2 especially reflect maturity and credit-driven improvements, including a release in the management overlay for the U.S., which more than compensated for adverse development of macroeconomic parameters, i.e., GDP and interest rates. Net additions in Stage 3 are driven by additions of minus EUR 21 million for European NPL, predominantly from investment loans from Germany and France, which were partly counteracted by EUR 11 million net releases for U.S. NPL. Overall risk costs for U.S. NPL, i.e., Stage 3 loan loss provisions plus fair value risk charges and operating income are balanced, underpinning that our provisioning level for the U.S. remains adequate. Even when including the aforementioned minus EUR 10 million fair value risk charge, total risk costs are very significantly down quarter-over-quarter to then minus EUR 12 million, which is clearly a reflection of the significant derisking we undertook in '25. As usual, then only briefly on loss allowances themselves on Slide 14. Here you see that all in all, the development of the loss allowance is a reflection of the LLP just explained, plus consumptions from the existing stock. Stage 1 and 2 allowances are slightly down for the reasons I mentioned. Stage 3 allowances are down quite a bit as consumptions for firmly reduced U.S. NPL that Kay explained, were overcompensating LLP additions in European NPL. At the same time and driven by the U.S., the total NPL volume is down by EUR 100 million or 4%, in reflection of consumptions for U.S. NPL, the overall RES NPL coverage ratio is slightly down to around 28% from 30% at year-end 2025. This then brings me to our new segment reporting, and I'm starting here with Slide 16. From now on, we will report on our 2 business segments, Real Estate Finance Solutions REFS and Real Estate Investment Solutions REIS as well as the Corporate Center. In REFS, we bundle the on-balance sheet trail lending business with its earnings and expenses as well as attributable expenses, including those of central functions plus allocated overhead costs. In REIS, we essentially bundle off-balance sheet fee income from pbb invest, including Deutsche Investment and Originate and Corporate. Again, on the cost side, we include direct costs of these operations attributable expenses, including central functions plus allocated overhead costs. And in the Corporate Center, we essentially bundle the operating income of our treasury activities, including NOL and realization income from our investment portfolio, liability management as well as hedging activities. Like in the other segments, Corporate Center costs include direct treasury costs as well as directly attributable expenses, including other central functions, plus allocate overhead costs. In addition, compulsory group costs like regulatory costs, bank levies or rating fees and group strategy expenses are also allocated to the Corporate Center. Earnings from equity investments are allocated across segments according to the allocated equity portion and the cost for the AT1 coupon are allocated in the same way. But they are only applied to the RoTE concept where they show, of course, a respective effect. All in all, this provides a business-oriented and economically adequate segment view, and it clearly improves transparency for you. Starting with REFS with the Real Estate Finance Solution on-balance sheet business on Slide 17. The financial performance of REFS is, of course, significantly impacted by our derisking and portfolio transformations and the effects that I explained for the group. With that in mind, operating income is down quarter-over-quarter by EUR 20 million from EUR 91 million to EUR 62 million. This is, of course, a reflection of the trends already mentioned at the group level. Specifically, EUR 11 million lower NII and NCI, EUR 7 million lower realization income and EUR 11 million lower fair value result in others. NII and NCI is burdened by additional SRT costs, as mentioned, minus EUR 10 million and the reduced portfolio volume while the transformation of the portfolio into higher profitability is still ongoing. The fair value result and other operating income item amount for negative EUR 17 million, down by EUR 11 million quarter-over-quarter. It includes the repeatedly mentioned minus EUR 10 million fair value risk charges for U.S. NPL, which, as you know, are more than balanced by the EUR 11 million release of Stage 3 U.S. LLP. I will not comment on the LLP line as they are identical to the group's as there are no risk provisions outside the REFS business in the quarter. Also, our strict cost discipline and organizational optimization, namely our target operating model is bearing fruit, as you can see. Operating expenses in REFS are down by EUR 4 million or 8% quarter-over-quarter with inflationary uplift on personnel expenses and the organizational transition being well managed and non-personnel costs and expenses reduced. All in all, the REFS portfolio remains in transition with the portfolio volume currently still being behind expectations. However, as mentioned by Kay, our overall strategic cause for on-balance sheet business is working. That is the portfolio profitability is increasing, risk costs have come down. and the operating cost base remains well managed. Just briefly now on the portfolios, which we allocate to the segment REFS and therefore, show it in the REFS segment. You see on the performing REFS portfolio that the significant derisking is showing in the key KPI for our performing European portfolio, which further stabilized or even improved in the first quarter. This continues the trend we've now seen for several quarters. The European NPL portfolio on Slide 19 includes German development loans, which account for 42%. Development NPL slightly decreased with one development loan of EUR 34 million having been repaid and no new development NPL in the first quarter. In light of the significant derisking of development NPL, especially in the fourth quarter of 2025, we now show an integrated European NPL slide and put the known deep dive on the development portfolio into the appendix. In the European nonperforming investment portfolio, we had 4 additions with a volume of EUR 196 million in the first quarter, one of which with a volume of EUR 94 million was rather technical and has already been repaid in April. All in all, the European NPL portfolio remains solidly covered by around 28%, down from around 31% per year-end. So sorry, again, I got disconnected. We will follow up on this. Sorry for this. At this time, I think the operator was quick in reconnecting us, so I don't think you missed a lot. I was just starting to report on our Real Estate Investment Solutions business on Slide 20, which obviously very nicely reflects the effects of the now integrated Deutsche Investment. Operating income, as you can see, strongly increased by EUR 9 million to EUR 11 million quarter-over-quarter. There are EUR 10 million fee income and EUR 1 million NII. In one sentence, pbb invest, which so far equals Deutsche Investment makes up for EUR 8 million fee income. There are EUR 3 million investment management fees and EUR 5 million property and facility management fees. O&C makes up for EUR 3 million, EUR 2 million fees and EUR 1 million NII. At the same time, operating expenses in rates overall increased by EUR 6 million quarter-over-quarter, including EUR 1 million one-off integration costs and purchase price adjustments rising from the first-time consolidation of Deutsche Investment. So all in all, this sees a balanced PBT in the first quarter '26 for rates up from minus EUR 3 million in the fourth quarter '25 and minus EUR 4 million in the first quarter of last year. Adjusted for the aforementioned integration costs and purchase price adjustments, PBT for the REIS segment would have been EUR 1 million, as mentioned by Kay in the intro. With REIS, we therefore diversified our income streams. We transformed from a practically pure NII bank to an NII plus fee-generating bank, and RC is on the way to generate profits and is a capital-light business, which we expect to become increasingly RoTE accretive as we go along. I will skip Slide 21, which we provided as a convenience with further information on portfolio and investor base of pbb invest and Deutsche Investments, but Kay covered that already at the beginning. So last, briefly on our Corporate Center. I'm on Slide 22. As already said, the Corporate Center importantly includes the treasury activities, including our combined investment portfolio, which comprises the former non-core portfolio and the bank's liquidity portfolio. Operating income is down quarter-over-quarter to EUR 4 million, not least because of lower NII from the maturing investment portfolio. As mentioned, expenses also include the bank's strategy costs plus compulsory costs of the group, such as bank levies. They remain relatively stable with EUR 9 million, leading to a PBT for the segment of minus EUR 5 million in Q1. That concludes the segment reporting, and I will now come to capital on Slide 24. The CET1 ratio has come down from the full year 2025 disclosure report figure of 14.7% to 13.4% at the end of Q1. This is in line with the 2 effects that we already clearly indicated with full year results. #1, minus circa 110 basis point reduction from the adoption of the EBA position on the nonequivalent of U.S. data for the computation of US LGD and F-IRBA, which leads to a full loss of the preferential collateralized LGD treatment for the entire US REFS business as per the end of the first quarter. At full year results, we indicated this effect to be around minus 135 basis points on a pro forma basis per year-end. Given that the U.S. portfolio shrank in the meantime, the effect came in lower at 110 basis points minus as was to be expected. The second effect is a circa minus 20 basis point reduction from the acquisition of Deutsche Investment, which again was well advertised. It's again worthwhile noting that our F-IRBA RWA are pro-cyclically elevated so that the F-IRBA CET1 ratio of 13.4% stands significantly below a pro forma standardized CET1 ratio of 15.2%, which many see as a regulatory floor. Nonetheless, our capital ratios remain well above F-IRBA requirements with around about 340 basis points buffer over CET1 MDA and around 222 basis points over own funds MDA. Also allow me to say that on the basis of sufficient available distributable items and this buffer, we were very clear and easy in our decision to pay the AT1 coupon. Our long-term through the cycle minimum level for the CET1 ratio remains unchanged at 13%. Finally, from my end on the funding and liquidity side, I'm now on Slide 25. We had a strong start in '26 in capital markets funding with more than 50% of the fund funding planned for '26 already completed in April '26 at a 13 basis point lower spread compared to 2025. On the senior side, our moderate needs and comfortable liquidity position enables a rather tactical funding approach. Retail deposits remain a cost-efficient source of funding. A stable volume of around EUR 7 billion is efficiently accommodating our reduced balance sheet needs. With an LCR of 185%, and NSFR of 114% and a EUR 4.8 billion liquidity position at quarter end, we remain -- we maintain a solid liquidity position. And that concludes my remarks, Kay, and I hand over back to you.

Thank you, Marcus. And also apology from my side with regard to the technical problems. I hope that the line now stays stable. Ladies and gentlemen, let me conclude by summarizing the key points of our Q1 results on Page 26. We are in the middle of executing our strategic transformation, and we are making good progress across all segments. Our new business in Real Estate Finance is growing, and it is growing profitably with a further increasing share in asset classes that are of strategic importance for us. And we have a strong pipeline for new transactions. Derisking and the exit of the U.S. market continues to progress. We have reduced our U.S. NPL portfolio by almost 1/3. Real Estate Investment Solutions for the first time makes a significant revenue contribution of EUR 11 million, enhancing pbbs diversification. With a pre-tax profit of EUR 6 million, we are within our full year guidance. Liquidity remains robust and capital ratios are in line with our expectations. The geopolitical and macroeconomic environment remains volatile for all market participants and it's difficult to predict in terms of its impact on the European economy and the real estate markets. With the Q1 in line with expectations and a good start into the second quarter, we remain confident to achieve our full year targets even in this uncertain market environment. And thank you very much for your attention to Marcus and myself. We are both now looking forward to your questions.

[Operator Instructions] And the first question comes from Sharada Patel from Citi.

So my first question would be on the negative fair value adjustments this quarter. I'm guessing that they were U.S. NPLs held for sale. But can you remind me on why they were held for sale? -- worked out organically? And can you also give me a sense of how many U.S. loans you've got in held for sale? That's my first question.

Sorry, can you -- we apologize. We hear you, but the line was not great. Could you repeat your question? We apologize for that.

Can you explain the negative fair value adjustments taken this quarter? Why would this be sort of U.S. NPLs held for sale given I thought the intention was to work them out organically?

Yes. And the second question?

And the second kind of similar question to that is just thinking about the future and any possible volatility on this line. What's the size of the exposure of U.S. loans you've got in held for sale?

Yes. So basically, thanks for your question and allowing me to clarify that. So you're right. We have fundamentally some portion of the U.S. NPL that we have in fair value as they were restructured and the restructurings that were undertaken require them to be hedged in fair value. The bulk of the exposure is, of course, an amortized cost. Now the fair value adjustments, they occur, of course, when you get new valuations, when you get a new bid, it's pretty much the same as you would have it in the amortized cost line. It's only that, of course, you have to show it in the fair value line and not in the risk provisioning line. So the mechanics and the underlying loans are essentially identical to the other NPL loans. They just have the technical feature that they have to be accounted for in fair value. Yes. So that's the answer to that question.

Yes. That's helpful. And then as a sort of follow-up, do the fair value adjustments have any impact on your expected loss reduction? It doesn't seem like there was a change in this quarter that was flagged in the slide.

No, that's correct. Yes.

Okay. And then I just got 2 more. So is there any update on your thoughts about back to a standardized model given obviously now the U.S. RWA changes have been put in place?

Look, Sharada, I can answer on that. The short answer is no. We are a foundation IRBA bank, and that's how we report it. We know and we have explained that also in our last presentation that the F-IRBA approach provides through cyclicality. And what we see right now is that we are very well below what comparatively would be a standardized approach. However, that it's just a point in time perspective and those considerations one would have to take through the cycle. So at this point in time, we are clearly an F-IRBA bank and report accordingly was showing the relative situation when the bank would be a standardized approach just to outline the fact of how procyclical at this point in time of the cycle, this approach is affecting us.

Got it. And then my last question is what's the sort of nature of the new business? I know you mentioned student housing, senior living, but what do you see for this year the kind of demand with given attractive spread?

Yes. Very good question. Thanks very much for that. I think you see it from our portfolio and you have seen it from the new business. I think nearly half of the new business in the first quarter, we wrote in logistics. So we see good dynamic, and I mentioned that this is an asset class, not only we have a strong market position in. Our portfolio is our second largest part in our portfolio, but we see clear opportunities there. Coming out of the fourth quarter and also into the first quarter, student housing in certain markets, in particular, in Spain, we have seen, but also in France are providing interesting investment opportunities from a margin perspective. And of course, and we should not write that off, right? Office remains one of the largest single assets in real estate. And we do see and come across good profitable and also from a risk return profile, attractive financing opportunities for office, although our strategy remains in place that our share of office in the bank has continued to decline, and we are targeting still remembering our strategy around 35% to 40% share of the portfolio.

And the next question comes from Tobias Lukesch from Kepler Cheuvreux.

Firstly, on capital. I was wondering you reported the core Tier 1 ratio now with the interim result included and you did not accrue for dividends. I was just wondering, is there a threshold, let's say, 13.5% or 14% from there on where you would potentially accrue for dividends throughout the year? And secondly, on the costs, just wondering like is there any particular still kind of one-off double costs involved in that Q1? Or is that a clear quarter basically to look at?

I can take your second question on the cost and Marcus is going to answer your first question on the dividend side. From a cost perspective, we clearly have the integration cost of Deutsche Investment. We highlighted that. That's the difference between the black zero and the EUR 1 million mentioned. Those are costs that are going to fade out going into the second quarter. And of course, strategically, we are working on developing the bank forward. There are minor additional costs from a strategic development standpoint. But overall, Mr. Lukesch, I would say it's a rather normal quarter, although in the last couple of quarters, that always has been the case. There has never been a big one-off item in there. What we can clearly say is, and we have demonstrated that over the last 4 to 8 quarters that consistently our operating cost is coming down. And that trend is continuing. You've seen that, that was the key driver of us being able to compensate in just 1 quarter the integration of Deutsche Investment from a cost perspective into the bank and keeping costs stable. So those cost reduction measures that we are consistently taking and we have reported target operating model, et cetera, those are elements that consistently are going to pay in and will continue to support our cost trajectory of the firm.

Yes. Good morning, Mr. Lukesch from my side on your question. So on a post-tax and coupon basis, actually, there was no profit to speak of, hence, also no money put aside for the dividend. And as usual, we would, of course, when we come to the year-end, then have the reservation for the dividend that we intend to pay at that point in time, which, as you said, would normally be a distribution total, meaning distribution of capital of 50%. But right now, in the first quarter, it was basically a post-tax, post coupon flat result.

Maybe a third one, if I may, on the volume development. Also, you showed a good healthy business pipeline. I was just wondering in terms of the total REFS portfolio, how much more of a potential decline should we expect over the coming quarters? Do you see the bottom of that development or an impetus basically for an improvement in terms of volume size? Or is that something which may further weigh basically on '26 given that the market conditions are actually not really improving and potentially even weakening, if I understood you correctly.

Yes. Very good question, and thanks for picking up on that. And let me say, first of all, certainly a development that looking at a very strong and good quarter in new business in the first quarter, which we are clearly not satisfied with that the portfolio is continuing to reduce. Now on the one hand side, there is a derisking and exiting the U.S. portfolio consistently is a drag on the overall portfolio. So that's going to continue. However, we clearly are working and also see with the business pipeline that we are gaining a momentum there to stabilize the portfolio. We guided EUR 27 billion to EUR 28 billion. We reconfirmed that. So we see clearly the opportunity there with the pipeline going into the second quarter to turn that development around and get a stabilization of our commercial real estate portfolio going forward. You have addressed one of the concerns, which we have been very outspoken here in this round as well, and that is certainly the macroeconomic development. Right now, with cash, we see a very strong pipeline, year-over-year up by nearly 50% from EUR 8 billion to EUR 12 billion. That shows that there is dynamic there in what is an overall sideward trending market. So our franchise has done a good job to really gain momentum, in particular on growth asset classes. However, the uncertainty is there that is for us hard to predict going into the second quarter. Right now, what we see is that we have a strong pipeline. We work on transactions and therefore, remain confident. But we also -- that's also clear, don't have the crystal ball. The longer the Middle East conflict is dragging on, the more pressure certainly comes on that trajectory. And we are monitoring it very closely and pushing, I can say that really hard on getting good new business. That is possible. I would like to add that. So we would not make a compromise. You've seen our RoTE remaining stable at around 7%. That is also what we want to see going forward.

There are currently no further questions. [Operator Instructions] Here we go. There is one more question coming from Domenico Maggio from Jefferies.

Can you provide a bit more color on the European NPL increase? That would be one question. Then the line was a bit disturbed when you answered to the first call on the fair valuing of the portfolio. Is it possible maybe to provide a sensitivity to rates into that? I mean I know this is kind of a pro forma exercise and there are many variables. But yes, basically some sensitivity would be helpful. And yes, that would be the first 2. I might have a follow-up.

Yes. Look, I take up the first question with regard to development of the European NPL. I think Marcus just said that unfortunately, there is one transaction in there, EUR 94 million, which as we speak, has already been repaid. So you could call it really a technical default that we have been having where literally the 90 days past due passed just before the repayment that happened in April. And that repayment came without any loss. So at the end, it's a kind of a pass-through. For the other transaction, I would say a normal development, yes, that it's in line with what we expect. You cannot rule out in a quarter to have one transaction that goes into default. So from that perspective, I would say, normal course of business Domenico with regard to the development of the European NPL. Some of the additions of the provisions that we have been making were on existing defaults as well, increasing coverage also as a reflection of, of course, in certain markets in the current macroeconomic environment, it doesn't get easier with regard to an outlook, and we have adjusted for that. But overall, the risk costs also taking the European stand-alone is developing according to our own plan and is in line with what we have expected.

Yes. And Domenico, thank you very much for your second question, and apologies if the acoustics were not so great. I think the sensitivity of our fair value accounted U.S. NPL to interest rates is not what is driving the both at all. It is rather, as I mentioned, new valuations, selling the loan, restructuring the loan, selling the underlying assets, which goes with new valuation. So it's credit induced, right? So I think it's very important to differentiate. And you can see that nicely in the segment reporting. On the one hand, we have fair value adjusted that come from credit-induced effects, and that is predominantly the U.S. fair value accounted assets. And again, these are purely credit-driven and not interest rate driven. On the other hand, we have, of course, a portion where the fair value is informed by the hedging that we have and the interest rate development. And here, you also have some sensitivity, which is, however, low given that the bank is taking a full hedging approach. You have some structural pull to par, which comes from the -- for the reason we mentioned that on previous iterations, which comes for the reason that, of course, we sold non-core assets and the according assets, derivatives, they actually pull to par, which is a structural effect. And then you have minor adjustments in this particular quarter from tenor risk. But essentially, this is interest rate developments and must not be mixed with the fair value credit changes that we discussed previously with Sharada.

Okay. And is the SRT running down as expected? Also, if you can just reclarify the rundown because I think you flagged EUR 10 million impact on the P&L, then at Slide 38, I see like the net interest income effect and the cost. So if you could recap there would be helpful.

I think you are reflecting, if I understood it correctly, the SRT rundown, right?.

Is it going as expected?

Yes, it is, as we speak, going as expected. You see the rundown profile on Page 8. And to provide the transparency that we have been giving in the backup around the cost implication, P&L implication as we speak according to plan.

Okay. So the annual cost that you see at the other slide, shall I just divide it by 4 because you provide the numbers yearly. I was just wondering quarterly, how shall we look into that?

Yes, I think that is a fair assumption, right? The portfolio is coming down. You see that from a rundown profile towards the year-end. But when you look into the respective quarter, that is probably rather towards the end of the year with the first maturities. You know that if someone invests in an SRT, they expect a certain maturity in the first place. So therefore, for this year, that's clearly a good assumption. In the next year, you can assume a more continuous pay down profile, quarter-over-quarter.

If I may briefly add to that. So I think in this year, you would expect it to drop only from Q4 onwards. And you see that then also in the forecast that we have been giving in full year results where actually the estimated annual cost for this year was EUR 44 million, which is, of course, in line with the EUR 11 million as discussed by Kay, and it would come down to EUR 26 million next year, and you will start to see that in Q4.

You provide a lot of color on the slide...

Thank you very much. And that concludes the Q&A session. I hand back to Kay Wolf for closing words.

Thank you very much. I was just surprised. I give it a pause. Is there any additional question because you just immediately added it over afte Domenico, but really give it back if any additional questions. It doesn't seem to be the case.

[Operator Instructions] Cool. Doesn't seem to be the case. Yes. Thanks very much. I apologize again for the 2 drop-offs on our end. We will definitely review that. Appreciate very much your participation, your listening in and of course, in particular, for everybody who asked questions. Thanks very much. If there should be more questions coming up, which is not unusual, our IR team around Michael and Axel are at your availability. Please don't try away reaching out to them, which I know you don't do anyway. So much appreciated. Thanks for dialing in, and we wish you a good day. Thank you very much.

Thank you.