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Good morning, ladies and gentlemen, and welcome to Deutsche Pfandbriefbank AG conference call regarding the preliminary results Q1 2023. [Operator Instructions] Let me now turn the floor over to your host, Andreas Arndt.
Yes. Good morning, everybody. This is Andreas Arndt, Deutsche Pfandbriefbank, Munich. A very warm welcome to our analyst call covering the first quarter results. I hope you are well, and we'll walk you through the topics as we have been. And as usual, we close the meeting with a Q&A session with you. When I look at the Q1 highlights, I see good progress in our strategic initiatives, which we announced around 9th of March with EUR 32 million PBT, we are in line with our full year guidance for '23. And the average gross portfolio margin increased, and we managed to keep risk provisions low while maintaining high stock of loan loss reserves. Also retail deposit volumes strongly increased.
As always, Q1 results include the full year bank levy of, in this case, EUR 22 million. Other things being equal, PBT would equate or would add up to EUR 48 million on a comparable basis. '23 will be a year of special challenge for markets for commercial real estate and for pbb. The transformation of -- and the transformation and investments in our strategic initiative is the first challenge. The second meaning an increasing challenging risk -- managing an increasing challenging risk environment. And the third one is keeping the operative results on track while making up for former Tier 2 and floors effects from previous years. As I mentioned before, we do not benefit from increasing market rates as yet and not yet. The bank has no site deposits. However, retail deposits will help, but will take a bit more time. Since we are, what we are and where we are with an interest rate balance and highly liquid balance sheet as strong capital basis, we strongly focus on structural measures and strategic investments around our core competencies, i.e., conservative commercial real estate management with a deep knowledge of markets, clients and assets as a foundation to further build and diversify this business in order to obtain a return on equity above 10% pretax. In so far and despite considerable headwinds, Q1 is started as expected and is a good start in terms of operative results towards full year guidance for '23 around EUR 170 million to EUR 200 million. And development with first results from our strategic initiatives. Now turning to Page 5, as it is. This is -- this takes us to remind you on our strategic trajectory and time line. '23 focus is on operative resilience and laying ground for our strategic initiatives. In the current market sentiment, this is exactly the right timing and is exactly the right approach. We will be prepared to leverage opportunities to grow once markets allow for it. While NII is still affected by the [ demise ] of the floors and the TLTRO, we expect a catch-up of NII from second half of the year onwards through beneficial impact from retail deposits as a comparatively low-cost substitute for senior unsecured from higher margins both in stock and new business and from lower-than-planned prepayments.
'24 and '25 should benefit into rates, showing tangible results from all strategic measures, both in revenues and in cost management and participating in renewed market opportunities in commercial real estate. And in '26, as we presented before, we had to release the full potential of strategic initiatives as will be shown in right end of this presentation. Now coming to Page 7. Looking at the operative key points or key figures, new business amounts. The new business for first quarter '22 amounts to EUR 1 billion, which is a reflection of both the significantly lower transaction in commercial real estate markets in Europe as well as in the United States, irrespective of which type of asset you look at. And secondly, the continuation further tightening of our underwriting standards in currently severely stressed markets.
The good news in that is gross interest rate margin stays at elevated level of 200 basis points. And so it does, as we can see already for the second quarter, and that compares against 150 basis points, which we saw in the first quarter of '22 and 170 basis points, which we saw for the full year '22 and is in line with what we saw for the fourth quarter '22, exactly also at 200 basis points. The volume of our REF portfolio grew by -- not by -- grew to EUR 29.4 billion by EUR 1.4 billion, which is significantly up over last year. The pbb direkt volume increase keeps a strong pace, further buildup of EUR 1 billion within a quarter's time. And if you compare the first quarter '22 against now, you see an uplift from EUR 3.2 billion to EUR 5.4 billion, which I think is significant. Now coming to Page 8, and giving you a short overview of what we see in markets, what we see about markets as sort of framing of our discussion going forward. We remain selective with focus on strong risk parameters and covenant structures. Currently, we set strong focus on portfolio monitoring and risk management. While European and U.S. commercial real estate investment volumes remain on very low levels in first quarter '23 and April '23 can be described at least for the German market as the weakest month since 12 years or 12, 14 years. Due to the ongoing difficult investment environment, prices are not expected to bottom out before fourth quarter '23 and deal volumes are not expected to recover substantially before 2024. What makes prognostications difficult is the multiplicity of variant and determining factors. First, there is the market or interest rate movements, a significant factor in influencing pricing, valuations and operative cash flows and debt servicing. Now there, we can constitute -- we can acknowledge that, thankfully, the latest noises from central banks with market points towards a more moderate price and interest rate policies, which is also now reflected in the actual market rates and which allows banks and sponsors to take more sober and forward-looking view on the interest rate component of valuations and pricing. The second point is more difficult to predict and is about structural problems. And of the structural problems, the first one is, of course, the working from home component, which we have discussed many times. Recent moves of large firms upon approaching the expiry of rental contracts show the following pattern and can be taken asymptomatic for what is going on in the market. After moving, the firm needs only 70% to 80% of the previous space due to reduced office attendance and working from home.
Adjustments to required space or price will be made mostly in the context of expiring rental contracts or option dates. This means with contracts usually running between 5 to 10 years, the capacity adjustments will seepage through for some time. But clearly, there's a significant overhang, which markets will have to absorb within this year and next year. And also firms look for best properties to rent even if prices may be increasing, as long as they're affordable. And statistics show that the office attendance in good and very good locations is on average 20% higher than in B locations. This might also explain that despite low yields and high interest trends, prices in first-class locations remain resilient, if not increasing.
And firms seek for office space, which is green. ESG compliance is and will be a great effect on valuation and pricing. And the third challenge is certainly and remains so the inflation and supply chain problems, although while there remains imminent political uncertainty, supply chain problems have subsided somewhat, and inflation is typically also reflected by index rental contracts in commercial real estate. Now if that is not enough, I add the last point to the mixture which is political and market anxiety about midsized banks in the United States that is [ catching ] about debt ceilings. And you may imagine why prognostication of market prices -- new market prices, the new equilibrium commercial real estate remains a difficult affair. But I should also say from all that they are from what we discussed and from what we see there, [ the following tools ] which may be safely derived. Even now and certainly after the crisis, there will be still commercial real estate and commercial real estate transactions and need for office. The fallout will be around B properties and B locations and the size of the fallout is also a function of ESG compliance and potential cost to manage green as it is on other structural challenges. Those points have been the guiding principles of our underwriting requirements so far and remain so. Now turning to Page 9. Now it's clearly not the time for extensive growth. I think that sort of follows from all what I said. New business volumes are on low level in challenging market environment. And as I mentioned, gross interest rate margins remain on elevated level of 200 basis points. We saw low risk provisioning with average LTV of 54%, calculated against new and adjusted market prices. And we also see that the average gross portfolio margin increase, which supports the NII going forward. However, from what I just mentioned, with still market opportunities in selected market situations and niches, the present indication for our Q2 pipeline shows a robust trend above the Q1 figure. And also keep in mind, the NII will depend largely on further development of stock rather than of new business as such. In times like this, we see more extension business and less prepayments, which naturally helps to substitute for lower new business. Now turning to Page 10. pbb's overall new business focus remains unchanged. We still see good opportunities in difficult markets like the U.S. based on strong -- as long as we are based on strong risk parameters and covenant structures and on higher margins. We made no new commitments in property types such as hotel and retail shopping centers except for the known extensions. But I should also say, and we take note of the fact that hotels have seen a shakeout and the cleansing after tedious times and retail propositions become subject to interest again. If locations and subsegments such as neighborhood centers and selected retail parks are good, we may look into that going forward. Now arriving at Page 11. Not much to say because it's pretty much known. And the changes against last quarter is relatively mild. I think we're still well positioned in current markets and current stressed markets, as you see from the solid development of LTVs. And you see that also in the clustering of LTVs where we are situated and where we are positioned. I think that speaks for itself. The average LTV of our portfolio is 51%, average ISC is about 300 for the firm as a whole or the engagements, which we have. And I should say that in terms of valuations, actual valuations of our portfolio, we're pretty much on time and actual. Now Page 12 which is -- it's a larger topic and covers the next 1 or 2 pages. And that is on the NPL and the NPL portfolio. We do manage NPLs actively and there's no or only minor provisioning needs on new entrants as a reflection. I think, as a reflection and as a proof of our positioning, non-performing loans are stable quarter-over-quarter with 3 new additions to the U.S. loans to the tune of EUR 137 million, mainly compensated by removal of 1 U.S loan to the tune of EUR 116 million. So that more or less balances out and that is now in cure period and will hopefully leave NPL world thereafter. Let me give you a brief on the next page, a brief and more general reference to NPL because it's frequently asked and because we see frequently now NPLs going through the door at zero LLPs more frequently than in the past. Overall, I think that's important to maintain and to repeat; overall pbb's risk positioning provides for moderate NPL levels and have been staying so. That should remain so even if we might observe more NPLs to come in the future. The other general observation is NPLs and risk provisioning are not the same. NPLs remain without loan loss provisioning where conservative risk position prevails, even in case of lower interest cover or covenant breach or increased extension risk. If the impairment test shows a positive balance, we have an NPL classification possibly because it's been classified as unlikely to pay default or whatever. So the NPL classification remains in place, but at zero LLP at zero provisioning, which is, for instance, the case with the majority of our U.S. NPLs just now. Despite severe valuation downgrades by the U.S. valuation firms, it seems that our estimate and our LTV framework is more conservative and actually leads to that position where for regulatory purposes and regulatory reasons, we need to classify NPL but materially in terms of provisioning we go on a zero basis. While last months have seen higher additions to NPLs, especially in U.S. office exposure, some loans could be cured and put back into regular portfolio after such cure period, which again shows the quality of the book. Now that takes me to Page 14 which is an overview of our U.S. portfolio. And where I probably should say that I've made most of the points I wanted to make, most of the prevalent points are the weak fundamentals, particularly for the U.S. office market with high vacancies and significant discrepancies between regional markets and subsegments need to be noted. It also needs to be noted that prime properties in A-locations with visibly higher presence in office and lower structural vacancies than average are still on the market and still available. Valuations of office and to a lesser extent, logistics properties are presently subject to significant value corrections. And again, subject to regional and structural differences, you see that also on the chart, what we sort of call East Coast, New York, Boston, Washington, which makes up about 3/4 of the portfolio, is relatively doing better than the special situation which we faced, West Coast, especially the tech firms who have adjusted their needs significantly, lead to some severe market pressure presently. Now a few comments on the office portfolio in general. Office investment volumes are on the historic loans, allows only a few A1 properties with long-term leases and good tenants are being transacted. The rising vacancies in office properties, which are not fulfilling the current requirements such as prime location, green property and so on are difficult to transact and many markets may still rest on comparatively low transaction levels.
Price adjustments are coming through and the total office portfolio saw 9 NPL loans with a total volume of almost EUR 400 million, which is somewhat less than 50% of the overall NPL amount and with a total risk provisioning of EUR 18 million attached to it. Now leaving the asset side, I would turn to the funding. And turning to Page 16, if I'm not mistaken. Yes. So it's Page 16 now. Focus is traditionally on a resilient and cost-efficient Pfandbrief. Unsecured funding has increasingly shifted to currently more favorable retail deposits, although the real effects of that, we will probably see only starting to see through in the second half of this year. We also focus on benchmarks and green financing. We saw Pfandbrief funding with 1 benchmark and 2 taps in the first quarter, and the unsecured funding dominated by EUR 500 million green senior preferred benchmark in January.
What we see is, as I mentioned and as I repeated is the increasing importance of pbb direkt retail deposits for funding with a clear focus on term money. pbb manages its liquidity on a 6-month basis. As you know, the liquidity buffer must withstand 6-months stress test versus the regulatory requirement, which is based on 1-month regulatory and regular forecast. And we have comfortable liquidity ratios, LCR presently is about 300% and NSFR above 100%. If you allow me on Page 17 to take a closer look to what we have achieved and what we do on the pbb direkt on the term deposit side, we have always thought and we adhere to that, that stable and affordable funding sources are key in volatile times. And certainly, [ that frankly ] remains one of the key resources going forward. But retail deposits become increasingly more important as a stable source as we focus on term money predominantly. And that is 80% of all retail deposits, which are term money and therefore, more than 50% with the duration of 2 years and more and an average duration of almost 3 years. Call money, which we also received can be fully paid out of [ Bonus ] bank account in case of need. Liquidity -- our liquidity position covers call money; several times in the call, the amount which has been deposited with the bank on call money amounts to EUR 1 billion only. And I should mention that pbb direkt deposits are 100% guaranteed either by government deposits insurance schemes or the deposit insurance schemes of private banks in Germany. What also happened apart from the volume increase and the volume extensions is that the number of clients increased by 80% since 12/21 from roughly 40,000 to 75,000 with an average deposit amount of EUR 42,000 per client. The good thing is more granularity adds to the stability and the franchise value, which we intend to further build out and foster by a more targeted marketing spend in cooperations with nonbank partners that provide banking as a service and be partners to take care of the deposit flow. Now Page 18 is on to you or we had this already last time. And structurally, it doesn't tell anything new, but it is good to look at because, first of all, it shows that even in difficult times, Pfandbrief is a very stable funding source, also very stable pricing. And pbb direkt in terms of economic costs versus our spread development versus 6-months Euribor shows the practical use of that and the relative value of that as opposed to the left-hand box of the senior unsecured crisis, which we have to pay. So very clear, very clear direction that there is strategic which to replace as much as is feasible and much as doable and accepted by markets to replace unsecured by term deposits as we go forward. Now we jump directly to Page 20, financials. Let's view which is Page 21. And as usual, that's an overview, and I will visit the main lines on the next page. A few comments on the smaller line items is on fair value measurement. Net income from the realizations and net other operating income, which compared to the rest, are relatively small. Net income from realizations benefited from a smaller prepayment and from sales from non-core unit, which is now the combination of public investment finance and value portfolio as runoff portfolios as we see for acceleration to wind down non-core assets.
Bank levy, I should mention, decreased as the target volumes of the European Deposit Protection Fund decreased and higher correction considerations both together resulted in lower fees, which we had to take through P&L. And what is also depicted on this page and should not -- and should be also pointed out the actual RoE and the cost income ratio, which we show in the first quarter, showed the need to swiftly pursue our strategic program, our business and revenue targets as well as our cost targets. Now a few words about NII on the revenue side of the bank, which, by and large, shows the structural challenges which we have, which shows nothing new because we already shared these insights with you last time, that which becomes a more visible once the figures are printed and actually shown. As mentioned, the loss of floors and TLTRO benefit weighs on NII as expected. This was partially compensated by increased average REF financing volume, while effects from strategic initiatives to show over time starting from second half '23. So in the summary and as an explanation against first quarter '22 with the results in first quarter '23, floors and TLTROs are now going to be washed out in the first half of the year. Second point, average financing volume and improved margins will contribute second half. And so will the substitution effects from deposits versus senior unsecured on a slowly but surely materializing basis. And I come to the strategic measures, which are directed towards the enhancement and the enlargement and the betterment of NII going forward, I believe that for the time being. Now the next page deals with risk provisioning. On Stage 1 and 2, the following comments, we had a net release of EUR 5 million, and below the top line figure, you can observe some significant movements. Stage 1 and 2 provision requirements increased as pbb recalibrated some key risk parameters such as interest and property prices.
We have now reflected higher market rates in almost all valuations and model parameters, and that's important, resulting in higher [indiscernible] due to stage migrations and also important property price projections or expected discounts on property price projections were revised from 9% to 12% on German office plus a 10% discount on the [indiscernible] plus another 20% added to the strong inflows, i.e., to make it less complicated, we look at German office, the value development or the property development in German office class for '23 to come to the tune of something between base and adverse scenarios between 22% to 34% discount. And we apply more or less the same figures for office in the United States. And that's a quite hefty correction. And again, it reflects -- the market movement reflects the increase in interest and the valuation impact thereof and should capture the developments which we see emerging for '23. So while market sentiment, especially on interest in properties is now fully reflected in stage 1 and 2 provisions, part of the management overlay became obsolete. You may remember that we increased management overlay by EUR 27 million in Q4 last year, expecting a further significant increase in market rates in '23. As now rate expectations have consolidated on a lower level than expected and the overall interest rate driven and price impact has been reflected in property prices in Stage 1 and 2 provisions, this specific MOL or management overlay became obsolete and was released.
So we reduced management overlay by EUR 27 million to EUR 42 million, with the remainder covering potential office market risks, including ESG transformation and working from home. As you can see, management overlay works as you are going to keep risk provisioning on a steady level. And last point on Stage 3, short one, I already mentioned that net additions of EUR 7 million, which are driven by one office loan in the United States. Now a further chapter on risk provisioning is on Page 24. The provisioning level at 134 and -- 135 and 134 basis points, which we have constantly increased in the past and which we have kept stable over the last 3 years. I think it's still conservative given the fact that the entire portfolio is collateralized. Almost 50% of the total LLR, meaning loan loss reserve, is general loan loss provision, stage 1 and 2. And thereof 25% is management overlay. And those are figures in comparison to the rest of the market, we, I think, can be quite proud of. Our conservative risk profile, as I mentioned on our last call, our conservative risk profile aims at a long-term sustainable provisioning level between 40 to 80 basis points. Now the other topic in question is the development of cost, general admin and expenses. Increase in costs in times of reduced revenues is not exactly helpful. Although the increase is still moderate and largely triggered by inflation, regulatory costs and investments, we need to ensure that cost levels are brought back to the 2022 levels and cost-income ratio comes back to levels below 45%, which we have shown in the past, which we have been, I think, also applauded for being able to manage our cost portfolio to manage that towards 40% to 45%. Now that is the target. That is the goal to go after in the future. Therefore, cost containment is an integral part of our strategic program. Ultimately, we need to find cost savings to the extent that we need to invest.
Therefore, we started compact cost management package, still to be finalized, which focuses on the following points: First of all, streamlining IT processes and projects; the second is internalization and near-shoring opportunities which we actively look into; third one is business focus on reducing unprofitable subsegments, such as CAPVERIANT, where I will come to in a minute and the last point is business and credit processes and the efficiency as we've demonstrated through the client [ posture ] and the credit workplace project as means to gain efficiencies and probably as a means to gain more and further efficiencies. While we focus on cost containment as we invest, we will not be able to fully synchronize strategic revenue uplift and cost investment. Nevertheless, we continue tight cost discipline in all operative lines, having in mind or having that in mind, 2023 is our year of investment to advance the planned strategic initiatives. There will be no strategic initiatives if we have no investments. There will be a major effort, both on revenues as well as on cost to realize the guided PBT at around EUR 170 million to EUR 200 million, which we aim for, despite difficult times. The FTE increase, which you will see and which we will see are caused by internalization measures on FTE against more expensive external resources, mainly driven by IT and sourcing from investments such -- and it will be driven from investments such as real estate investment management. But again, cost discipline on all fronts to remain integral part of our strategy. Now PBT is a summary of what I just mentioned. I think I may just skip that view. The components of EUR 32 million have been described. And that brings me to the page on capital, which is Page 28, which again shows a familiar picture with about EUR 17 billion in risk-weighted assets and the CET1 ratio around 16.6%. I think it is important to stress again that our strong capital base allows for both buffering for upcoming risks and taking advantage for profitable growth opportunities. RWA already, as you know, are calibrated towards anticipated Basel IV levels. Now the next 2 pages are dedicated to ESG. And I think I can keep that relatively short. That's Page 30, 31, 32. First of all, green bonds. With the launch of the placement, which I already mentioned, green bonds rose by EUR 0.5 billion, i.e., EUR 500 million. Now being at EUR 3.4 billion and with that figure, I think we're still one of the outstanding issuers of green bonds in the European markets, not only in Germany. Our green real estate finance portfolio share is now 18%, 26% on the scored portfolio. And the portfolio share, which is scored is now at 69% after 45% last time, so we are making significant progress. And the figure which is attached to that is 26% as being constituted green, is a figure which sort of shows the trajectory towards the 30%, which we have in mind as a target for '26. So now to round up and to return to the beginning, and that is about strategic initiatives on Page 33. Let me come to the progress which we made while executing on our strategy. The first bracket or the first chapter is profitable growth. Strong business margins lead to increasing gross margin in existing portfolio. That is a good first step and that we want to and need to continue. However, while the project rolls on, we need to move more systematically in repricing and pricing our portfolio. In terms of stricter business selection and ranking according to relative contribution, in terms of revisiting segments with a better business outlook as crisis proceeds, I mentioned hotel and retail.
And in transformation of green financing -- sorry, in transformational green financing, i.e., CapEx financing, i.e., turning B grade or ground rated properties into green A properties with more focused, more margins and green CapEx. I should add that on the topic of green finance. We mentioned already that we strive for a cooperation with a renowned partner. The process is in finalization, we're going to sign the contracts shortly. And then green consulting, we can follow [ suit. ]
It is important, not so much to actually generate revenues from the consultancy as such, what is more important is to make green financing possible through say, very specific competent approach and explaining to our clients what needs to be done in order to turn the corporation green. The other aspect which falls into that is revenue diversification. Dr. Pamela Hoerr onboarded since mid-April as a designated Board member responsible to build up a real estate investment management and cooperations with Universal Investment for Fonds Servicing and Amundi for Sales. And the other topic, which also falls under this headline is the focus on core business. We have transferred public investment finance and value portfolio to non-core unit with the aim to save costs on overcollateralization, but also to see whether we have ways and means for further and accelerated rundown of the portfolio. The discontinuation of the public investment finance business, the public sector business also includes the discontinuation of the intermediate or platform business for municipality loans, which is the long version for the short description of CAPVERIANT which we will not continue.
We have announced this to start this morning that we wind down the business or sell it in parts or in total to interested party. There is an interested party around, which has signed with us in LOI Friday last week. More details to come. That's all I can say about that. What I want to mention is that -- and that sort of goes straight to the colleagues at CAPVERIANT, they did a good job, especially in the last 2 years. There were more business inquiries and steeply increasing business inquiries. But the problem, business becomes business once you have a transaction on it and not just an inquiry. And the amount of transactions was still too low and the breakeven too far out. That was one point for our decision. The other one was -- we have, as you know, a French partner, the CDC. We did set hopes in the corporation in a fruitful way to enlarge the French business. That did not take place to the extent which we foresaw. And so selling parts of the business is an option, which we currently pursue, as I said, and otherwise, for the rest of it, we will wind down the business with some that should not be underestimated, with some immediate cost savings afterwards. Now the next block on the list of strategic initiatives is around funding diversification. We talked about that with the retail deposits, which are now at EUR 5.4 billion. We will further build that out via marketing, via corporations. The target is at around EUR 8 billion plus as a substitution of funds for senior unsecured. Digitalization, the progress in digitalization initiatives, i.e., customer portal and process efficiency was mentioned.
And as I said, and we described already, costs remain part of the strategic agenda. And the cornerstones, the highlights are, we aim at a level which is calibrated on '22 levels and 45% cost-income ratio. And as we invest -- as we go to invest, we need to find savings to compensate for that. Those are the 3 principles by which we run this topic.
We have undertaken upon many requests from your side to split up the effort, which we have in front of us, on Page 34. I wouldn't say it's illustrative as we are still in the process of finalizing the conceptual part of it and the calculation part of it. But I think it gives a fairly good indication where the positive effect should come from. Again, always on the presumption that the costs related to that, the investment costs related to that will be absorbed by cost efficiency measures going forward.
As you know, to start, from the left-hand side, we suffered from loss of income from floors, which we generally profited from the last 5 years, and TLTRO, and that needs to be compensated through margin pickup on the REF portfolio, real estate finance portfolio, growth as such. Growth of retail deposits and optimizations on Value Portfolio and Public Investment Finance. Increase of net fee and commission income. That's the investment management, the debt fund business and the business around [ originate to distribute ].
And we also said, I mentioned that earlier on, we see the total level of risk provisioning below what we presently see also in 2022. Now that's sort of short cornerstones. We will further detail that, and we'll continue to report on the progress on the respective initiatives.
With that, I come to the end of my presentation. The summary of highlights and the point I wanted to make is, first of all, '23 is a year of investment, very clearly so, uphill battle and investment with speedy implementation of the strategic investments, managing increasingly difficult markets risk-wise and keeping operative track. '23 first quarter is in line to reach the full year guidance for '23.
We have realized significant growth in retail deposits to support NII, especially in the second half of the year. We have increased gross portfolio margin as well as new business margin to maintain and further -- to be maintained and further augmented. And Stage 1 and 2 risk provisioning are calibrated towards demanding market environment in '23. And should -- why we have done that, it should keep the new requirements low.
So with that, that's where we are in the first quarter. Thank you for listening, and I'm happy to take your questions now.
[Operator Instructions] And the first question comes from Tobias Lukesch, Kepler Cheuvreux.
I would start with an NII provision question. Could you maybe give a little bit of an indication for Q2? I know you highlighted the H2 catch-up effect, especially for the NII line. But given that there was a kind of 6% company consensus miss, one, could you maybe elaborate a bit more on where the trend for Q2 is? Is the NII flat? Is it still slightly down compared to Q1 or maybe even already see a slight uplift here?
Also, potentially, what is the TLTRO effect that we still have to factor in for Q2 compared to Q1 as a basis? And on the risk provisions, would also be interesting to get a view on a Q2 provisioning so far.
Secondly, on average asset evaluation. I think you have given a nice portfolio split and also [ LTVs ] and also [ PIFs] portfolio and the Office portfolio. Considering that, you said, okay, there is still potentially not yet the bottom reached. I mean, in a severe downside case, how much of the further devaluation would you expect for your Office portfolio? And maybe also, in particular, your U.S. Office portfolio? And ultimately, how much of the portfolio would you then expect potentially to reach the LTV of or above 100%?
And lastly, on the CAPVERIANT sale, I think that was a kind of EUR 5 million loss-making per year from '18 to '21. And could you maybe provide the 2022 profitability because that was not given in the '22 annual report? And maybe share a consideration whether or not that may result in a further loss, one-off loss with the sale, and what the potential wind-down scenario would cost you over the years to come?
Okay. Mr. Lukesch, thank you very much. I mean the first one on Q2, when I was referring to an uplift in NII, in revenues, I was always referring to the second half of the year, not the second quarter. So we still expect a slow movement in the second quarter as far as NII is concerned, but we believe that the second half should be -- second half of the year should be looking more benign.
And the point which you mentioned, a miss in the consensus estimations, I think, might come from the fact that the impact of -- the substitution impact of term deposits on senior unsecured has perhaps not been factored in for this -- or comes later than expected, let's put it this way. So far, what we take on our books in terms of term deposits is largely augmenting our liquidity. And that has simply something to do with the fact that our senior unsecured is not easily ready to sort of to be deported.
But we need to look at the rundown of the portfolio of senior unsecured and how -- add a maturity date that can be replaced by other means, i.e. term deposits. And that presumably comes later than was indicated. So -- and that's also one of the reasons why I believe that '23 second half will look more benign in terms of NII movement.
Now on risk provisioning, I'm not giving a forecast for the second quarter. What I said is that we have revisited the risk calibrations on the Stage 1 and Stage 2 provisions and made allowances for further steeper depreciation of valuations on the book as a whole, specifically on Office going forward. It's been made in the opinion that by doing that, we capture the presumable developments in the market, in the commercial real estate markets going forward.
And as I said, we still have, say, 3 scenarios, which we look at: the base, the adverse or strongly adverse and the good scenario. We did not change the weighting, so it's still 55% on the base. And if I remember correctly, 40% for the strongly adverse. We left that.
And then basically, if you take the figures, which we attached to the model, plus the add-ons, which we put on top of that, we -- in the strongly adverse scenario, we would assume that the discounts on markets, both in United States as well as Germany, could face something around 34%, 35% discount.
And that is given the segment in which we move. We do these forecastings for our portfolio, not for a market portfolio. That this has been done for our portfolio, that's a pretty tall order. And I would say, if nothing else is going to change significantly, if the rates -- the interest rates remain where they are being prognosticated just now, my feeling would be that we have well provided for -- on the Stage 1 and 2 side, well provided for the year '23.
Now that should also answer part of your question #3, which brings me to your comment or your question around CAPVERIANT. Now the cost run rate, which we would forego going forward, from '24 onwards, is around EUR 3.5 million to EUR 4 million, which is the cost savings, which we realized. There will be wind-down costs, which we pocket this year and which are part of our forecasts.
If I may touch again on the average asset evaluation. So you said, based on your portfolio, you would expect, in a severe case, another 34% to 35% discount on current market prices. I was wondering, I mean, how much would then move to that 100% LTV that you have or above that? You have a number on that? Is it 10% of your portfolio? Or...
I'm just looking at the LTV page on the portfolio distribution. And frankly, I don't have the figure with me. So we would have to look into that. But we talked about the portfolio, and that goes, more or less, for U.S. and for the overall portfolio. Like we talked about the portfolio where we have 41% -- 51% LTV throughout, with small regional variations against that.
That was -- can't read the page number, something like 20-something. It's Page 11, right? So the average LTV is 51%. If you look at the distribution of LTVs throughout the clusters, you see that the vast majority is below 60% or below 70%. So there might be some, but I can't give you the exact figure.
Okay. If I look at the distribution, you would move around EUR 1 billion, basically, to that 100% rate. That would be then kind of 3% of your portfolio. But I'm a bit surprised about the high number of 34% to 35%. We're still expecting, because I was of the opinion that in the past, you were rather going for these [ type of ] redevelopments.
Whilst we were, in general, expecting less of an asset devaluation risk, that was always my understanding, also with regards to the green view, also with regards to the good buildings you were investing in. And I was expecting that this would rather be -- yes, then the company [ would ] rather have this higher number of on-site working stuff, et cetera.
So honestly, I would rather expect the kind of 20% discount you see here rather than the 34%, 35%. So why is that really so severe, in a severe case to be fair, right? I mean, are we missing anything here? Or was there really something that's deteriorated over the past 3 to 6 months, which let you adjust that scenario a bit down?
I'm not 100% sure whether I'm missing something in your concerns. I think what we do at the end of the day is that we look at the overall market trends. We look at the subsegments and then see what's the collective wisdom of the valuation companies is on the further market development and what the collective wisdom is from our valuation people within the bank. And that's the sort of the market-driven figure, which we apply.
But for the prime segments which we cater for, that's how it comes about. Now with all due respect, that's a figure which is attached against the strongly adverse scenario, which is weighted for 40%. Base scenario looks somewhat more benign. But I think it's just evidencing that we apply relatively conservative estimations towards our valuation in order to calibrate loan loss provisions for Stage 1 and Stage 2.
Understood. And you mentioned the base case. Could you give us maybe the kind of devaluation you expect in the base case, which then, I guess...
I think I mentioned that we talked about something like 20%, 24%. And we still have a small good case, if you're interested, which looks furthermore on the benign side.
So the next question comes from Johannes Thormann, HSBC.
Some questions on my side as well. First of all, on your NII, it has been pretty volatile in the last 5 quarters. And now you say we see a slow movement in Q2 and an uplift in the second half. What gives you the confidence? What is driving this? And then I'm, let's say, outrightly puzzled by the EUR 40 million contribution you expect from retail deposits under '26 because, yes, mostly the most price-sensitive area where you get your deposits and then have zero stickiness because no customer relationship is attached to this. How can you bake in such a high number coming from that? Secondly, on your new business and the net income from realizations and real estate finance. We have just EUR 1 billion, but we had EUR 4 million of, let's take net income from realizations, so pre-drawn net interest income. This is also a question, again, what do you expect in this line to come in the next quarters in new business and then net income from realizations? And probably, in that context, to add on net income from realization, was this EUR 10 million a one-off? Or should we rather expect more net income from realizations from the noncore portfolio? And last but not least, you talked about cost discipline, but currently, I'm struggling to see any cost discipline at all. And I'm a bit puzzled that you closed CAPVERIANT now after defending it for the last quarter. What has triggered the decision now? And what makes us sure that we don't see the same disaster with real estate management -- investment management?
Now I'll start in reverse order. I mean, CAPVERIANT is not a disaster. It's been an investment which we made as a first step in public sector finance to go away and come away from on-balance sheet business to create a platform, which produces off-balance sheet platform, which is using new technologies, agile technologies, cloud computing, digital computing and things like that. And I think that the bank has greatly and overall profited from those things, which we tested and which we did first in CAPVERIANT, in order to gain expertise and bring these things also to the bank. So that's the first thing.
So I think and I still hold towards the investment idea, but in times where you focus on commercial real estate, in times where you focus your resources, amongst many things, which we do at the same time, you have to make decisions whether you want to continue and want to spend further means and ways and people and capacity on something which will bring a relatively slow and low contribution in some time, but not soon. So I think, from a business point of view, it was a rational decision and the right decision to make.
Now you said how do we ensure that similar investments do not go astray. I think the first point is we have a new Board Member for that with a clear responsibility, and I think to pay full attention to that and to see that we built this business case. I think it's the first guarantee to have that on the successful side. And I mean, in discussions which we had, I think we have the same opinion that, especially in these market situations, it is good and it's the right thing to do to invest in businesses which are off-balance sheet, which broaden our scope, which diversify our business going forward.
So I'm not concerned about that. On the contrary, we're making really great progress on the investment management side. But we have the right focusing of resources on that and doing a good job.
Now you said cost discipline, you don't see that first quarter. While you can take it this way or the other way, I think what -- as far as the operative base of the bank is concerned, we are still doing good. However, and repeat myself, for going forward, we need to find efficiency measures where we can sort of put a lid on to cost developments.
And how we do that and why -- when we do that, I mentioned also we have experience with that. We did something similar on a smaller scale 4, 5 -- 3, 4 years ago, with focus in invest -- where we said what we invest and what we're giving to the bank needs to be financed and cross-financed from the bank, from the key areas, by focusing resources and creating efficiencies. And that is exactly what we will do also in this case. We will come up with more details around that sometime soon. So I think the message is very clear on that side and should be read in this slide.
Now the other point which you mentioned on realization. Now from business, I do not expect that to be a recurrent item, but we will have realizations from sale of bonds, from recapturing issues which we placed early on and from the noncore unit as we go forward. So that is rather not business-driven in the commercial real estate side, but it's something where we see further additions to that coming through the rest of the year.
On the deposit side, you mentioned that the amount which we attached to that as a revenue contribution or NII contribution seems to be high. Now we can argue about that. I'll give you an example. If you assume that, given the cost structure, the [ spec ] structure -- somebody is typing all the time. Okay. The -- if you look at the total cost of the senior unsecured as of today, you would have to pay for, say, 3 years base rate Euribor. You would have to pay, on a 3-year basis, about 300 basis points.
Now if you look up pbb direkt, you would also have to pay 300 plus senior -- sorry, senior unsecured, you pay 300 plus the spread. Herein, the bank has to pay when it goes to market, which is -- which presently can be anything between 170 to 250 basis points. So if you take that as total cost of it, which gives you something between 400, 450 basis points, and you compare that against 300 basis points senior -- sorry, deposits, you make good for, say, anything -- or depending on your assumptions, anything between 100 to 150 basis points, which we make good.
So -- and I'd say, that's the exact figure which we put behind the business case. Our figure is actually lower, and it sort of stretches in the buildup over the next 3 years to come. But that it is -- that it is likely that we maintain this positive advantage, relative advantage, against senior unsecured, I think, is very clear. And therefore, if one of the figures, which we talked about in this bridge, is solidified in assumptions, I think it is around the deposits.
Now on coming to your first point, which is my last point on NII, I mentioned that I think we will see some of the detrimental TLTRO effect still in first half 2023. That will be washed out in the second half. We will see that higher margins will permeate through the portfolio as we go forward. Sorry.
So the fact that we have new business margins above the 2022 levels does not mean that sort of soaks in immediately. But that takes some time before we actually see that realizing in our portfolio, and that should come through in second half 2023. Plus the fact that the average outstanding should stay stable or increase versus last year, that's another element which we should take note of.
Our next question comes from Borja Ramirez, Citi.
Can you hear me?
Yes, we hear you.
Perfect. I have 2 questions, if I may. And the first one is, so regarding the -- in your internal models, the real estate price decline that is included, I understand it is 20% to 24% decline in the base case and 34% to 35% in the strong adverse scenario. This is across all your portfolios. I would like to ask if you could please provide some detail between U.S. and Germany.
And then -- and my second question would be, if you could please provide a sensitivity of your expected loss to a higher -- a one percentage point higher decline in [ resid ] prices. What would be the impact in the expected loss in euro millions? And also in the interest rates, because I understand that if interest rates were to rise further, then I understand that your overlay would need to be adjusted, if you could provide some details.
Okay. I'm not 100% sure whether I caught all points, maybe you have to help me. Now on the first one, on the models and the price decline, what I gave to you were sort of samples of certain segments and regions. So we do distinguish -- in the calibration of these price movements, we do distinguish between asset classes, say, hotel, residential, office or whatever, and different values will apply. It's not across the model and not across the portfolio on one figure only. So there are differences and there are also smaller figures.
I was just giving examples for office in Germany and the United States, and those are the figures which you quoted. And to preempt possible other question, we don't publish this matrix. I just tried to give indications about what we see in different segments and subsegments as an indication for you to estimate what degree of conservatism we apply or may not apply. So that's the first point.
The second point on expected loss, I must confess, I got a little bit lost. Can you repeat your question?
Yes, of course. So my question is, let's say that in a scenario whereby the resid prices were one percentage point higher or lower than your forecast, what would be the impact in the expected loss models?
I mean, I know we do this kind of exercise in sort of stress testing and simulation of our portfolio, but I can't give you the figures right away now. We do that -- from what I remember, having seen in our risk reports, it's not major shifts, which you observed on a 1% shift. But I don't have that figure in mind just now.
The last question, which you had, if we were to face another significant increase in interest rates, whether that would sort of mean anything for the parameterization of the Stage 1 or Stage 2 of the management overlay, let me put it this way. We also have a conservative calibration on the interest rate scenarios going forward. The add-on, which was reflected in the management overlay to the tune of EUR 27 million, was based on market expectation plus another 180 basis points.
And the market expectation actually comes in somewhat lower than we expected, and the 180 basis points on top did not materialize at all. So I think it's sort of market consensus just now that we see moderate further increases in interest, at least before the summer break, and the rest needs to be seen. If there is a significant further change, yes, we have to go back to the drawing board and have to look at that again. But that is a matter of course.
I think the key message on what we have quoted from our models is we took the opportunity in the first quarter to sort of flesh out as much as we can on model assumptions going forward to build a decent Stage 1, Stage 2 provisioning, which, from today's perspective, carries us through the year.
Just a very quick follow-up, if I may. On the -- the add-on of EUR 27 million was based on 180 basis points increase in rates?
Well, there was a market estimate, I cannot remember how much. And we said, if that should come through, plus another 180 basis points on top, then how much we would have to reserve against that?
The next question comes from Jochen Schmitt, Metzler.
I have 2 questions, both on the German part of your real estate finance book, please. Firstly, regarding the LTV for your real estate loans in Germany, you seem to have reported a stable figure at the end of March compared to year-end '22. How much of the properties underlying your loans were revalued in Q1?
And the second question, what is your expectation for the development of the LTV during the remainder of the year, also with regard to your loans for properties in Germany? These are my questions.
Not so easy to answer. We keep actual valuations fairly recent. So how much of that sort of has been sort of rated through in the first quarter, I can't tell you. What we can say is that the exercise, which we just talked about in adjusting the model parameters going forward, we've done that on most recent assumptions and the valuation should be sort of the most recent thing, which we have to offer.
But to be fair, in all fairness, there's not a complete rerating of the total portfolio just now. We have done that in the past due to COVID reasons on a much faster track, and we look at that regularly. Also, you might actually find a page on the appendix, if I remember correctly. If I see that correctly, it's Page 58, which shows you the term and the turn in which we do regular reratings, which, as we speak, we do more often than it's sort of been described by the book.
So I would say, despite the fact that market values come under pressure, the 51% is a very reasonable achievement because it is done on relatively recent valuations. Giving an LTV for the entire year would be asking a little bit too much. I would have to think about that.
So at the moment, there seem to be no further questions. [Operator Instructions] The next question comes from Dieter Hein of Fairesearch.
I have some question regarding your new noncore segment. And my understanding is here that you want to wind it down over time. And if I look to your Slide 43, the total assets of new noncore were, end of last year, around EUR 15 billion, and you want to reduce it by around, at least, 20% in 2026 to EUR 12 billion. So why can't you wind it down faster or you don't want to wind it down faster?
And connected to the volume, what is the average maturity on this portfolio? And maybe you can give us some figures regarding your targets here. And maybe you can give the number of employees working for this new noncore unit in 2022 and what you are targeting for 2026. And maybe, as well, some figures for the costs. What cost reduction are you targeting in 2026 compared to 2022? That's currently all from my side.
Well, I would say, Hein, thank you very much. It's good for the beginning. Now the first thing to explain is our portfolios are fully financed and fully hedged. So to accelerate the wind-down beyond the scheme, the schedule, is something which is only possible by incurring cost of breaking hedges and fundings. Therefore, we stick, by and large, to the wind-down structure, which we find.
There might -- according to market situation, there might be opportunities, smaller opportunities, where we can do something, and we will constantly pursue that. But the forecast, in terms of getting rid of the wind-down scenario, the noncore scenario, basically hinges on and is modeled around the runoff of the portfolio according to plan. That's the first piece.
Now the cost reduction or the cost reduction exercise, which is linked to that, is mostly and predominantly linked towards the needs of collateralization, which we had so far on the public investment finance portfolio, and which, by combining both the value portfolio and the public investment finance portfolio, may reduce significantly and may give us a sort of medium to -- or mid- to 2-digit million figure in realizing gains or realizing cost efficiencies by running down the rating and the collateralization on that portfolio. That's the key lever which we pursue.
We have already done some of the cost reduction in the past years. As we -- as you may recall, we put the public investment finance portfolio on to hold rather than in terms of -- other than actively pursue this business. So the origination and sales and underwriting side of the business was already significantly reduced. We will look into further opportunities to further reduce headcount on that.
But as the portfolio doesn't sort of fly away, we need still capacity in our credit risk management to look after that. But there will be ways and means to further gain and to further nominate efficiency coming out of that. That is certainly one of the points which we will address as part of the package of our cost savings measures going forward, which we are in the process of putting together. Those are the answers I can give to you at this point in time.
Okay. Maybe -- sorry for that, a follow-up as well from my side. Regarding the duration and the EUR 15 billion portfolio end of 2022 in this noncore segment, when would you expect the volume below EUR 1 billion, in 10 years? I don't know.
We can give you that figure at some time. I don't have it with me. The average duration of the portfolio is somewhere between 7 to 10 years with a tail, which extends much further. So we will have pleasure to keep some of that for a longer time. But the bulk of it, we would expect to be removed, and that's also indicated on Page 43 in the presentation. The bulk of it will be removed between '26, '27, '28.
That is especially not so much by a nominal denomination, but by risk-weighted assets and capital, which has been tied up for the Italian bonds, which are good quality, but risk-wise or capital-wise, still weigh a lot. And after that, after '26, '27, we should have a much easier sailing on the entire portfolio with a much smaller figure. The exact one, I can't produce off the -- off just now.
So thank you very much. It seems that, at this point, there are no further questions. So I'd like to hand back to you, Mr. Arndt.
Yes. Pleasure. Thank you very much to all of you. I conclude this conference herewith. As you know, for all the things which I have omitted or have not stated clear enough, Michael Heuber and his team is there for bilateral consultations. Please make use of that.
Thank you very much for joining, and I'm looking forward to the next conference or the next meeting or the next discussion with you. Thank you very much. Stay healthy, and all the best. Have a good day. Bye-bye.