Aareal Bank AG

XETRA:ARL

Earnings Call Transcript 2020-Q1

[Jürgen Junginger, Managing Director Investor Relations]

Good morning from Wiesbaden. And I'm really happy that you're joining our Q1 conference call here in these challenging times. And if I look out, I think we can make the world brighter than it is now outside, but Hermann is the expert on the weather, so I don't want to take any of his speech from him. So Hermann Merkens, our CEO; and Marc Hess, our CFO, is going to present the figures. And later, we will take your questions and we'll be happy to. Please?

[Hermann Josef Merkens, Chairman of the Management Board]

Yes. So as Jürgen has stolen somewhat of my intro, the actual weather forecast, I'm happy to have you on the line with us for the Q1 presentation. And if I may start with Page 4, a little bit dealing with the actual situation. Clearly, the COVID-19 crisis is one of the sharpest, if not the sharpest, global recession in post-war history. And as you may imagine, clearly, we will guide you through our view on the further development and especially how that may impact our group company and our businesses.First of all, starting point, clearly, we do have a quite conservative risk profile, which is good to start with. We do have a strong capital base. This is again good to start with. We have a solid liquidity position, which is good to start with. And last, but not least, we do have a well-diversified business and funding profile. We're not just engaged in commercial real estate financing, we do have Aareon onboard as well. And that is another point on the good end. What do we expect? We are not the ones looking for a V-shape recovery. So what we expect is a gradual recovery throughout 2020 and '21. So we thought and looked after what is the best description for that. And we ended up with a swoosh-shaped recovery. For those which are not familiar with the symbol, it's simply on every Nike shoe, short and sharp decline, and after that, the gradual recovery. So that is our base assumption, how it will go on with the world after the fall in Q1 and Q2 2020.On Page 5, short summary. Solid group financials, and Marc will guide you through the details. Strong capital and liquidity position, resilient segment performance and, last but not least, more important, the outlook. Based on our assumptions and clearly from today's point of view, we consider a substantially positive operating profit to be reached. More to the outlook on Slide 36.Asset quality. So if I may start with the pie chart on the very left -- top very left, you know that we are diversified by region, diversified by property type. We are not that much diversified by product type because most of our financings are investment finance, 99%. And the most important thing is clearly the average LTV, and we will come to that in a later slide, but the fairly low LTV with a low variance around the average of 57%. So all in all, a very robust portfolio to start with.On Page 8, a little bit of breakdown of our commercial real estate portfolio. So overall, some ups and downs in the portfolio. U.S., U.K., more or less foreign exchange-driven. So no major changes compared to year-end portfolio. And as I said, with an average LTV of 57% is fairly good starting point, which we've shown on Page 8.Page 9 is a little bit of translation of the pie charts and some different view on -- of our entire portfolio. If I may start with the very left -- top very left, starting point into the world financial crisis, that's the red mark, which indicates that we started at that point in time in history with some 70% LTV. Today's LTV is clearly better. And as you see here, the portfolio distribution is -- goes hand-in-hand with a very fairly low variance. So what you could read out of that? We have a fairly small tail risk. And clearly, you could translate that into a portfolio risk matrix, which we've tried to do on the top right hand. You could count what is value-wise above 100%. In the above-70% LTV bucket, if you would do so, you would end up with a EUR 250 million figure, roughly. And that's the value shortfall, if you like. And then you could play a little bit with probability, whether you really would have a default or not. And then you would end up with numbers. But even the EUR 250 million simply indicates, even if every single loan above the 70% LTV barrier would go into default, and we do have -- would have to do a loan loss provision, then we would end up with a EUR 250 million number, which is equal to a somewhat normalized 1 year profit. So that's my translation into a very robust portfolio. It's not our expectation, but simply to indicate that we are feeling very comfortable with the portfolio. Even volume-wise, if you look simply what does that mean is if we are talking about this EUR 250 million numbers, you would end up with somewhat EUR 1.5 billion on portfolio volume. So that is represented here in the left chart. So very robust starting point. And if I may so, I would guide you through the various portfolio ingredients starting on Page 10 with the hotel portfolio, which again is, first of all, diversified throughout the various regions, North America with some 40%; Europe West, 45%, as indicated, very diversified. The starting yield on debt pre-crisis is very robust with 9.6%, which clearly somewhat indicates, if you are right with our swoosh-shaped recovery, you should expect that we end up at a certain point in time, but with this gradual improvement, clearly not so far away around that yield on debt again.And the second last bullet clearly deals a little bit with portfolio nominal numbers above 70%, EUR 29 million. So I would say not that much above 70% LTV. And EUR 9 million above 90%. So even in that respect, a very robust portfolio. Maybe some remarks about how the portfolio performance is out of today, clearly, most of the hotels are closed for COVID-19 reasons. The liquidity position of the owners is relatively sound and good. So we do not have that much request of amortization of finance or grace periods or interest rate grace periods. And what one should not underestimate is the effect of governmental support. For example, North America, more or less all our hotels are applying for the governmental support programs. Just an indication because I know that most of you might not be familiar with the details, but in the U.S., if you are applying for that type of program and if you use the money to finance admin expenses, especially personnel expense, the FTE to up to 75%, then you could use the 25% for other purposes and the loan would be turned into a subsidy. So it's no loan anymore. It's simply a subsidy, which the hotel operator could use for these purposes, which is a little bit different to other programs, clearly, especially different to the KfW programs here in Germany. Just giving a real subsidy in some of the cases, especially in North America. So overall, a very robust portfolio. You've seen maybe on some quotes on -- from large hotel operators. We expect, so to speak, a relatively fast recovery in China and even though in North America. China, by the way, has reopened more or less 90% of the hotels. Average occupancy after 6 weeks now of the reopening is somewhat in the region of close to 40%, between 30% and 40%. And the hotels, which are looked after, are 5- to 4-star hotels. And here, one clearly has to watch out that the comments of the large hotel operators clearly are dealing with the hotels which they have under our contract. And not that much, that's my impression, where the real travel business is running. So improvement in China. And that's a view we do have for other regions as well, that we will see a gradual recovery throughout 2020-'21, which will take place even in our hotel portfolio.Retail portfolio, again, fairly good starting yield on debt, 9.5%. We clearly have seen some reopenings in Europe. And as an example, again, in Asia, we do have 2 shopping malls which closed during the COVID crisis in China. So they've recovered fairly quick. And -- so it's not of my expectation that you see kind of copy-paste in all over the marketplaces. But in general, I would expect that even the retail end will recover relatively quickly, clearly, if we are dealing with our expectation of a swoosh-shaped recovery.Italy. Maybe an interesting slide, especially if you look into the above-70% area, which is just EUR 45 million. So -- and a fairly high yield on debt, 8.2%, which clearly indicates that the measurements we have taken last year with the derisking, that was, so to speak, right point in time to decide on that. So our overall portfolio in Italy is fairly robust, I have to admit. And as you see here as well, we do not have that much or just 3% of the portfolio are hotels, rest of it is office, logistics and retail. So having said this, I would say, the Italian performing portfolio is relatively robust.The defaulted exposure on Page 13. Yes, we do had to account for 1 new NPL in the U.S. Yes, it was pure bad luck. So everything was signed. Everything was contracted. So 1 day before signing, the investor pulled out of the restructuring, just really 1 day, pulled out of the restructuring, simply hinting into the COVID-19 -- the upcoming COVID-19 crisis. We provisioned everything, but there's no other deal around in that, so to speak, area. So simply a one-off bad luck accident which happened in Q1. But Marc will guide you through the loan loss provisions in more detail in effect.On Page 14, just a short recap on potential Stage 2 effects. And I'm saying theoretically potential or what you -- however you want to name it. It's simply the update of a slide, which we've presented early 2019 once the Stage 2 calculation came up with the new IFRS regulation. And even here, you see that we've clearly improved the portfolio quality. The dimension of a potential 100% just moved from EUR 150 million year-end 2018 now down to EUR 100 million. Although I have to admit, and I don't know how Marc will comment on that, how one really have to calculate Stage 2 effects, we will see because there's a lot of debate around that. But just to give you an indication, if we would apply to the same rules we presented as we prepared this slide in 2018, it's simply, again, an indication that our overall portfolio quality has improved significantly since then.If I may so, I'm now on the segmentary reporting. First of all, Page 16, yes, we now have 3 segments. So the one is clearly the Structured Property Financing. The other one is Consulting/Services Bank. And the third one, clearly, as indicated, simply to -- that you could track that better, we separated the Aareon from the other segments. So in the Consulting/Services, you will find our deposit business and the payment services. And Aareon is separated from that from now on.On Page 17, some brief information about Structured Property Financing. We started into the year with a fairly robust new business. And if you look into the pie charts, you will find out, yes, we've done some hotel finance here, a relatively large portfolio deal, which -- with fairly low LTVs and relatively high liquidity support from the sponsors. So risk/reward was okay, and hence we followed the deal. The new business margins with 234 basis points, exactly, which is clearly above the 200 basis points, it was fairly good. There's a portfolio, as expected, relatively on the lower end of the EUR 26 billion to EUR 28 billion guidance, with EUR 26.1 billion, an effect from the derisking, which took place in Q4 last year. So -- which have clearly some reflection in our NII. And Marc will guide you through that as well.On Page 18, the new segment reporting. And as indicated in Q3 call, January and February, yes, we have a new modeling for our deposits, and on the other hand, improved earnings statement with respect to transfer pricing. So a lot more transparent is now what's the true value of the deposit-taking business clearly is. And in Q1, we ended up with an operating profit of minus EUR 3 million. Net interest income improved to EUR 10 million at the same time. Overall, quality of the deposits improved, as I indicated, from 2015 to Q1 2020. Significantly, it's not just the pure volume with EUR 10.5 billion, it's a composition which improved as well. On the Aareon business, so Aareon is well underway. And I would say, and that's the last 2 bullet points here on Page 19, the crisis will turn out in our view as a catalyst for further digitization in the entire industry. And clearly, Aareon will benefit from that very, very good. The midterm targets so far will remain, but I would expect that if one would take that into account, they should improve over time. Do we have a COVID effect in the Aareon business? Yes, a small one. It's expected some EUR 10 million effect so that the original guidance, EBITDA-wise, EUR 68 million to EUR 70 million have to be reduced by this EUR 10 million. That's consulting business, which needs a clear physical access to the property. If you have a lockdown, you can't do the physical access. So that's the reason here. All the other businesses are running according to plan or even doing better, as you see here on Page 19.On Page 20, a little bit more breakdown on the various businesses, 2 remarks here again. The digital business has grown 30% quarter-on-quarter, clearly, A, based on higher penetration; but secondly, clearly reflecting the CalCon acquisition. So overall percentage is now at 23% in Q1 2020. Next important remark is recurring revenue shares is now up by 65%, which means that we do have, with the Aareon combination of IT company, which is clearly in the EUR 100 million shop and box of companies which do have a recurring revenue in that size. So clearly above EUR 100 million, which is very, very important and stabilizing the entire business. At the same time, the digital business is clearly growing from quarter-to-quarter and from year-to-year. So very, very good figures here.On Page 21, again, a little bit more detail which is not shown here on the page, a comment from my end to the revenues per unit with EUR 25 per unit. If we look around the world, and if I say world, then I mean world, what is the revenue per unit equivalent in other companies, you will find out that revenue per unit in property management -- there are not that many companies, I have to admit, I don't find any company with a 25% revenue per unit, which clearly demonstrates that the Aareon is here -- has here an outstanding USP, which is quite important to notice.Strategic initiatives in the Aareon world, clear underway. So we rolled out the Aareon Smart Platform last year, which is growing. We are about to roll out a Virtual Assistant. And there are clearly other bits and pieces which will be launched this year, inorganic initiatives and M&A. Clearly, we've done the CalCon deal in last year, and the CalCon deal is effective as of 1st of January 2020. I refer to that commenting the Q1 figures. Other M&A activities to be expected throughout the year 2020. And in our press call, I said -- I clearly remember when we -- the time we've done the first acquisition in Aareon, it was 2009. Clearly, right in the financial crisis at that point in time. And clearly, we indeed intend to invest in the Aareon business regardless the overall market turmoils we see in other parts of our group.So may I ask to -- Marc, ready?

[Marc Oliver Hess, CFO & Member of the Management Board]

Yes, absolutely. Thank you. Thank you, Hermann, and good morning from my side too. I'm, of course, happy to present the Q1 financials to you in more details now. And as Hermann Merkens just explained, we concluded Q1, including the corona-related effects of slightly more than EUR 40 million, with a PBT of EUR 11 million and showed a good underlying performance. As every year, please take note that the full cost of the banking levy and the deposit protection scheme have been considered in Q1, that was a total of EUR 18 million. As you can see on Page 24, the P&L NII stood at EUR 123 million, reflecting, amongst others, the lower portfolio volume due to the successful derisking in 2019. I will give you more details in a second. Regarding derecognition income, with EUR 7 million, we are left -- we are back on a normalized full year average after the benefits of the adjustments of the treasury portfolio in Q1 2019. And of course, it is still unclear whether this EUR 7 million can be a benchmark going forward for the quarters to come because typically, if there is uncertainty in the markets, there are less repayments.On the loan loss allowance, EUR 58 million, we booked the EUR 50 million corona-related effects that we had just mentioned. Net commission income showed a nice increase of 8% to EUR 57 million, so continuously up. The fair value and hedge result was positive with EUR 11 million. Here, we had EUR 7 million effects from syndication and EUR 3 million valuation of our derivatives, so basically interest rate swaps and then cross-currency swaps. The admin expenses, they include, as I just said, the banking levy costs, and they also benefited from an underspend due to corona effects. Well, and other income, as you can see here, was neutral.So talking more about NII on Page 25, as just mentioned, we started with a fairly low portfolio size into 2019. So overall, due to derisking, we have a treasury portfolio that is EUR 1.2 billion below the average volume of last year's Q1 and the commercial real estate portfolio that is EUR 800 million below the average of last year's Q1. Here, please take into account that there is a peculiarity this year out of this new business that we generated, EUR 1.1 billion, EUR 300 million were only paid out in April. Last year, we had the full payout in the quarter where it was generated. So that also diluted a little bit the portfolio size. And on top, we actively -- as just mentioned, the effects went on with our syndication. Remember, we were already quite well underway in Q4 as we had generated some portfolios, especially office portfolios in France in Q3 and Q4, which we wanted to syndicate. So here we continued and syndicated more than EUR 300 million in this quarter, also, let's say, burdening somehow the average portfolio size. Nevertheless, regarding that portfolio size, we expect to increase it back to the middle of the range of the EUR 26 million to EUR 28 million throughout the year. And on that basis, we are also confident that NII should move back to roughly EUR 130 million in the quarters of the second half.LLPs on the next slide, were, as just mentioned, particularly affected by COVID-19 with EUR 50 million this quarter. We were, Hermann just mentioned that, especially unlucky with one exposure in the U.S., where we had already successfully negotiated a restructuring, including a capital injection with the sponsor or by the sponsor. And then as mentioned, when the corona crisis kicked in, this was canceled for obvious reasons. So we had to book EUR 33 million of LLPs. But as of today, we can also say we have no comparable case where we are in negotiation or restructuring talks. Secondly, we adjusted our macro parameters to reflect the muted economic outlook and prolonged the realization periods for some selected NPLs, and that led to an additional increase by EUR 17 million. So as you can see on that chart as well, the underlying LLP of EUR 8 million was completely in line. Net commission income fees, nice increase, as just mentioned, by 8%. Aareon contributed with EUR 4 million. Consulting/Services contributed with EUR 1 million. Hermann just confirmed our full year outlook here, plus 15%. So we are well in line with the Consulting/Services fee income. And then we had some, yes, rounding and consolidation effects. This is why I just mentioned EUR 4 million and EUR 1 million. And you can only find EUR 4 million if you're looking in the chart. Admin expenses, they improved quite substantially by EUR 15 million or 10%. That includes corona-related underspend of EUR 10 million that may revert partially in the course of this year. On top, we had growth-related cost increases of EUR 5 million in Aareon, including the EUR 1 million strategic investment spend as announced. And if you do your comparison, just be reminded that in Q1 last year, we had, of course, EUR 9 million integration costs booked for DHB. So let's now move to capital and balance sheet. Capital on Page 30. I think as you're all aware of, we are well capitalized and even increased our capital ratios in Q1 to 20.2% under Basel III and 14.2% under Basel IV. So if I read your tables correctly, still above the average of the European sector under Basel III with our 14.2% Basel IV figure. Obviously, after the strong request of the ECB, as you know, we proposed to the AGM not to pay out dividend for 2019 as of now and to transfer it into other retained earnings. So that is considered in these figures. In contrast, RWAs under Basel III increased slightly by EUR 300 million due to the payout commitments I just mentioned basically and some other effects that you find here in the chart and some collateral also that has not been incorporated yet in Q1, but in April, which will then, of course, show some relief in the second quarter.We also did a comparison on the next slide with the SREP minimum requirements. That shows you that we currently have a buffer of more than EUR 1.3 billion to that minimum ratios. That's a factor of nearly close to a 2.5%. The buffer increased, as you are certainly aware of in P2R. We can now partially fulfill it with A Tier 1 and Tier 2. That equals a 1 percentage point decrease of that hurdle rate or threshold in Aareon's case. In addition, we have already digested the full TRIM effect and built up potential provisions in a linear pattern.Balance sheet remained basically unchanged, as you can see on Slide 32. We did create a nice liquidity buffer due to the derisking end of last year. This is how we moved into 2020. So we had no need for action on the funding side on the top of the crisis when spreads were particularly high. And on top of that, Page 33, as expected, our housing industry deposits proved to be a stable funding source during that crisis. So they have even shown that they are a very attractive funding instrument due to the overall wider spreads for capital market instruments. Nevertheless, we reopened the market in April with a successful transaction, placing EUR 100 million senior preferred notes at attractive spreads. You can see them here, 95 basis points over mid-swap for a 3-year duration. And we believe that this proved the good reputation of Aareal as an issuer, because it was basically below what our competitors had to pay.The treasury portfolio on the next slide is basically unchanged. We used some reinvestments after the maturity of some of our positions to even improve. The rating mix, it's now at BBB, is now at less than 13% or at 13%. Remember, beginning of 2019, before the derisking and the restructuring of the treasury portfolio, we had a BBB share of around 20%. So let's move to the outlook. Certainly, a difficult challenge in those days as no one has the crystal ball, nor do we. So basically on Page 36, you see the crucial question to be answered is about the scenario. So precisely when will the economic recovery kick in and with what momentum? Here, we are in line with the majority of the economists in our assumption. We assume, as you can read it here, continuous normalization of the global economy from mid-2020 onwards, followed by a significant recovery in 2021. So followed the already explained a swoosh curve, which shows a slower recovery than the V-shape. Based on that assumption and from today's point of view, we consider substantially positive operating profit to be within reach for 2020. So that was from my side. I would like to hand back over to Hermann at this point.

[Hermann Josef Merkens, Chairman of the Management Board]

Yes. Thank you very much. So key takeaways, Page 38. So to speak, hard to say where we might have seen a quite good starting point into the COVID-19 crisis with a very robust portfolio. We've seen a solid operating performance, quite good underlying performance if you simply deduct this famous one-off event in the U.S., which Marc and I referred to. We clearly see that we are facing manageable risk even in adverse scenarios. Hopefully, we've done a realistic guidance. As Marc explained, from today's point of view, we consider substantially positive operating profit to be within reach. And last, but not least, I explained a little bit that the group is not just consisting out of commercial real estate financing, which is good in itself, but we do have this payment segment with some IT projects underway with the housing industry, and in addition to that, DRM business, which is doing very, very good in this crisis time. This is a quite good addition and which we think that the business will even develop better than expected as the crisis could be seen as a catalyst for digital innovation in the segment Aareon is in. So thank you very much for your attention. And Marc and I, we are happy to take your questions. Thanks.

[Operator]

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

[Johannes Thormann, Global Head of Exchanges and Analyst]

Johannes Thormann, HSBC. I have 3 questions, please. First of all, on your new business, could you specify how much of it was written ahead of mid-March when the lockdown came into power and how the current volumes in April were? And then probably also a bit on the margins, we saw a decline still year-on-year despite being above your plan but still it's actually down. How -- did we see any change in market sentiment for margins? Are customers paying to -- willing to pay more? Or is new business debt for the time being? Secondly, on your segments, could you elaborate on the NII assumptions and also say where the bank levies and the regulatory costs have been booked? And last but not least, probably on your RWAs. We see the Basel IV RWAs moving mostly against the Basel III RWAs, but this is still difficult to calculate. Can you provide more insight on this? And also, could you provide an insight on your RWA expectations for Q2?

[Marc Oliver Hess, CFO & Member of the Management Board]

Yes. Johannes, thank you for your questions. Regarding the new business, the EUR 1 billion real new business that we wrote in Q1, certainly much of that -- most of that was generated before the crisis kicked in. Nevertheless, in the course of the year and certainly not quarter-by-quarter, but still, I think this is a good reference for the quarters to come. So we are also confident that we can write new business in the quarters to come, and we are also currently talking to clients here. Then of course, one has to note that in crisis times, the composition then somehow of the portfolio influencing factors shifts. That means you typically have -- and I pointed to that, commenting on the derecognition income, you typically have less early repayments or less repayments overall. So we will also probably keep a larger part of our portfolio, which margin-wise is certainly not a bad thing. You were asking about margins, 200 basis points, and you said that was below last year. That is true if you compare last year's Q1. But remember, last year in Q1, we had a very particular mix with a large share in Asia and we only had EUR 500 million of new business. This year, the mix, as you can see it here, reflects much more the average of last year. We have that on Page 17 in comparison, Q1 to last year's average. And if you compare the margin we generated now compared to the average margin of last year, then you can see that we are above that average margins. Then your next question was, I think, on the Consulting/Services segment and the banking levy. As I explained in the P&L for the group, we reflected it completely but -- and this is unchanged to last year. In the segment's P&L, we only reflect that on a quarterly basis. So it's 3/4, so to say, now in the other consolidation line, and 1/4 is already reflected in the Consulting/Services segment. And then on RWA, your observation is correct. We had a decrease in RWAs in -- under Basel IV and an increase under Basel III. There is always some peculiarities about that. One thing is the collateral that has not been realized yet. As said, that is burdening particularly Basel III because here, that would improve on LGD basis. Whilst in Basel IV, that is not a burden as here, the link is much more on the LTV side. Then we had some revaluation effects also, let's say, with an effect more on LGDs that burdened Basel IV -- Basel III RWAs. And what else to mention -- I think these were the 2 main effects that we can mention here.

[Hermann Josef Merkens, Chairman of the Management Board]

Maybe, Johannes, from my end, one comment to the overall transaction volumes we are seeing today, which is clearly an indicator for activities we could pick up. Asia is where we are not that active with the business. But in general terms, Asia is somewhat improving. We see some trends, actions, if I may so, in the U.S. that might be -- that we could pick up, the one other deal in that area. Europe is -- I would say it's the famous wording in today's environment, under full lockdown with respect to transactions. So as we've seen some deals in Q1 maybe entering into Q2, but now it's a somewhat complete standstill, which will clearly move away once we are following this gradual recovery we are expecting. And overall margins in new business, clearly, one should expect that one could see, from case to case, a little bit of pickup. And we've been very active on that in the end of Q1 and all the deals which have been closed or signed -- sorry, signed in early April. On the other hand, liquidity and banks is still not too bad especially on the European level. So -- but U.S., clearly, is the market which is capital market depending. And here we see some remarkable margin pickup in our business but not that many deals as expected.

[Operator]

The next question is from Benjamin Goy of Deutsche Bank.

[Benjamin Goy, Research Analyst]

So 3 questions from my side, please. Could you maybe disclose your euro million amount of Stage 2 loans? And you mentioned hardly any interest in amortization holiday request so far. But if you give a bit more color on that, it would also be helpful. And then secondly, on your guidance, I appreciate that in particular one line, probably difficult as of now but maybe the more stable lines, net interest income, potentially fees and also costs, whether you can give at least some ballpark figures here for this year, that would be helpful. And then lastly, your dividend. You withdrew your proposal a bit later than some European banks. So maybe some insight into the consideration process of the Board. And remind us of the conditions of the supplementary dividend, which we got quite used to in the last years. So what is the difference for the 50% versus 70% to 80%.

[Hermann Josef Merkens, Chairman of the Management Board]

Okay. If I may start with the dividend. Clearly, we had a proposal out there for the dividend for a long while. At the very end, the ECB took a clear wording with respect to dividends. And as we are regulated from that end, we clearly followed the advice of the ECB to park the decision about the dividend. And hence, clearly, we followed that advice. And could you repeat the question with respect to the dividend -- the last part? I didn't get that. Sorry for that.

[Benjamin Goy, Research Analyst]

Yes. Sure. Sorry. I said we got quite used to the supplementary payout as well, so bringing the total payout ratio to almost 80%. Maybe remind us what is the condition for more than the base payout.

[Hermann Josef Merkens, Chairman of the Management Board]

Yes. The overall condition for more than the base payout is somewhat that the weather is, I would say, clear. Although we've maneuvered through not that easy market conditions now for a while and we've been able to stay with the 80% payout ratio. The rationale behind that is clearly a combination of expectation, capital position, which is very strong in our case, and the overall market environment. So it's difficult to assess the road ahead of us to be honest. But as Marc explained, we still do have -- we still do have a fairly good market position and capital position. So that makes it -- makes us strong, although I have to admit I don't know what are the circumstances if we do have to decide about dividend next time. So with respect to amortization holidays, indeed, we found and we are clearly in talks with our clients all day long. But the overall liquidity position of our clients and the support not just from a government -- from the governmental programs, as I explained, especially for the U.S., but the overall liquidity position of the clients, is fairly robust. So we do not have that many requests in that direction. If we do have a request, it was more whether our client is allowed to, for example, close the hotel at all or whether, indeed, we would forgive or are okay with the amortization holiday. Interest payment support, not that many cases so far. Maybe there will be more if we're moving along the way, but so far, not that many. So -- and I think Stage 2, I move over to the -- in the hands of Marc Hess.

[Marc Oliver Hess, CFO & Member of the Management Board]

Yes. Obviously, what Hermann just commented, we don't have too many moratoriums and demands for moratoriums. So we haven't seen any Stage 2 movements so far. All those loans where we granted some relief were within our credit risk standards. And here, of course, we are following the advice of the standard setter of the ECB, that we look how this particular loan was performing before the crisis and we look through the crisis. And therefore, we don't have Stage 2 movements there. Of course, this is something that has to be checked and revised quarter by quarter. Regarding the Stage 2 risk provisions, that increased from EUR 16 million to EUR 28 million within Q1 but that was due to these macro parameter adjustments that I just mentioned. Then you were asking for more guidance on NII, fee income and costs, if I understood you correctly. Well, as said, we are in difficult times, and therefore, guidances are always difficult to make. But I also said that we expect the loan portfolio to increase slightly to the mid of the range, where -- which we gave, EUR 26 billion to EUR 28 billion, and that should also support NII. So I expect NII to be close to EUR 130 million in the quarters of the second half. For fee income, we still expect it to grow. However, Hermann Merkens also mentioned that some minor parts of Aareon are affected by COVID-19, mainly the consulting part where our consultants cannot go to the customer right now. Of course, they are also working from home office, but still revenues are somehow diluted. So that should be considered in the fee income projection. And with costs, as just said, we had some underspend in Q1. And I would say some of that -- let's say 50%, but this is really not a calculation, it's just an estimation -- may come back in the quarters to come, so nothing on that side here. In contrast, you will then, of course, have a relief from Aareon spend when there is less revenues. But of course, this is not a one-to-one relation because they do also have some fixed costs.

[Operator]

The next question is from Jens Ehrenberg of Citigroup.

[Jens Ehrenberg, Assistant VP & Analyst]

Two from my side, if I may. So the first one, on your provisioning, I appreciate EUR 50 million basically booked on COVID-19-related impact and that EUR 33 million of that is related to the U.S. NPL. Now looking at the EUR 17 million model parameter adjustments alone, so that doesn't look very huge at first sight. Just wondering how we should think about that over the next quarters to come, if you expect there should be further impairments just for model parameter adjustments really. And the second question I had is just for clarity really on Aareon. So I think you mentioned the EUR 10 million EBITDA impact basically from the consulting business where your consultants can't attend the -- well, the real estate physically. Does that already take into account that some other parts of Aareon might perform better in the current crisis? Or is that really just stand-alone, what would fall away because your consultants can't attend the sites?

[Hermann Josef Merkens, Chairman of the Management Board]

Yes. If I may start with your last question, it's clearly somewhat, as you may saw a one-off effect for those businesses where you really need physical access to the site. So overall, if I look into the commission income line, it's not that much. Even on EBITDA level, it's not that much, the calculated effect, but it's a clear one-off. The improvement of the business followed -- following the real crisis times or the lockdowns clearly will kick in, I think, end of the year, but especially the mid-term and long-term effects of that will be, in my view, very remarkable because everybody is now aware of which process does not work, so to say. And clearly, it's looking for digital solutions in many areas even to follow property processes if you can't access the respective site or property. So that will give the Aareon digital business, especially in the property management arm where they're active in, I would say, a real push, if I may so.

[Marc Oliver Hess, CFO & Member of the Management Board]

Yes. And regarding your question on the risk provision especially on the EUR 17 million model parameter adjustments, first of all to split that up for you in more detail, EUR 7 million relate to the prolongation of the realization periods for existing NPLs. So obviously, when we originally expected to wind down some of those this year or next year, we said that in the crisis, this may not be possible. So we prolonged that period. This is then certainly something that comes back via unwinding. The remaining EUR 10 million are for the, let's say, classic parameter adjustments, so especially the PD and LGD. And you say that, that doesn't seem to be much. Well, I think that always has to be seen in relation to the Stage 1 and Stage 2 risk provisioning stock. And if you compare that, then you can see that this is more than a 20% increase. That takes into account the current scenario and some uncertainty as well. You were asking may that change going forward. That may change going forward if, let's say, the scenario changes going forward. But I think we, on the current basis, have well reflected what we see.

[Hermann Josef Merkens, Chairman of the Management Board]

And one addition from my end. That is the main reason why we simply are providing the other information. If you would test the entire portfolio, simply ignoring any accounting standards, what does that really mean? So -- and here then, my comment on that end was a little bit -- the overall portfolio improved compared to year-end 2018, down from the 100% shift number from EUR 150 million down to EUR 100 million, which clearly explained that if we do have an overall fairly robust and a good portfolio, then the nominal numbers might be seen or -- might be relatively small, but the overall increase is still, as Marc said, some 20% of the stock.

[Operator]

[Operator Instructions] We have a follow-up question from Johannes Thormann of HSBC.

[Johannes Thormann, Global Head of Exchanges and Analyst]

Just could you elaborate a bit on your RWA outlook? I didn't catch what you said for the next quarter. So I probably missed it. And the second thing is on the pro rata dividend, what assumptions have you made?

[Marc Oliver Hess, CFO & Member of the Management Board]

Well, the RWA outlook is, of course, as well linked to the macroeconomic outlook. And as long as we are not seeing a deterioration, let's say, for a prolonged period but stay in that swoosh shape, that means that we see the recovery starting now and gaining momentum, then we don't see too much of an influence from the current crisis. But as said, yes, all projections that we currently give are as of now, as of what we are seeing now, and therefore, please always take this as a disclaimer.

[Hermann Josef Merkens, Chairman of the Management Board]

And maybe in addition from my end, clearly, the valuations will roll in over time throughout the year 2020. So clearly -- when we'll see an RWA, especially an RWA effect, you know all these calculations of the ECB stress scenarios, which are more prolonged stress scenarios, which are clearly showing an old model bank relatively harsh RWA effect. I would say it's clearly depending on the overall development and how the values will be affected, especially in 2020, whether we are at the lower end of an RWA effect or whether we are moving into that territory at the very end. But having said this, I'm quite confident that given the overall fairly robust starting point of above 20% common equity Tier 1 ratio, we clearly are able to absorb that. And on the other hand, if we are really ending up in this swoosh scenario, it's a really temporary effect. So that's a little bit. If we are talking about somewhat, I would say, uncertainty on the regulatory and even on the accounting end, we do have this famous Stage 2 provisioning type of thing where everybody is pointing into kind of look-through calculation. On the other hand, you have the PD element, which is clearly more towards a point-in-time, so to speak, view. Clearly in our PD scenarios, there's a kind of development effect as well embedded, but it's more towards a point-in-time scenario. And in addition to that, I would expect that, especially in the PD/LGD combination, we will see, at the variance, some other effects throughout the year. So it will be -- will not be nothing.

[Marc Oliver Hess, CFO & Member of the Management Board]

It's really a volatility, yes. They should reverse.

[Hermann Josef Merkens, Chairman of the Management Board]

But as I said, if you are following that path, as indicated, that will certainly happen this year, over time, this temporary effect -- RWA effect, sorry.

[Operator]

The next question is from Dieter Hein of Fairesearch.

[Dieter Hein, Analyst]

Dieter Hein from AlphaValue. I have 2 questions for my better understanding. Firstly, regarding your dividend policy, you canceled or withdrew -- suspended your dividend for 2019 to period after October 1 and BaFin forced you to pay. My question is if I see your assumption with the capital where you participate from the nonpayment of the dividend, do you expect with your COVID crisis scenario to return to 2019 dividend after the 1st of October? And if I could imagine if the crisis is as you described, then the BaFin could force the German banks for the financial year 2020 as well not to pay a dividend. So to make it short, my question is when do you expect that you can return to a dividend payment for which year? This is my first question. And the second is regarding your EUR 50 million COVID-19-related loss allowances for first quarter, you said EUR 33 million are from new U.S. nonperforming loan case as you finally negotiated a restructuring, which was canceled due to the COVID crisis. So is then the assumption right that without COVID crisis, there would be no loan loss allowance for this U.S. case or only a lower amount? That's question #2.

[Hermann Josef Merkens, Chairman of the Management Board]

To question #2, none. So clearly, the restructuring was clearly to overcome the difficult financial situation of the customer and one that was about to inject new capital and collateral. And this was actually skipped, so to speak, with inflections with the COVID crisis. And hence, at the very end, we've taken a conservative approach given the overall circumstances. I'm not quite sure whether we answered the question of Johannes, to what extent we followed our dividend policy within Q1. Although the number is small, what we've done, Marc -- so maybe I place that with you, but clearly he's happy that I brought that. So -- but the other question was a little bit -- and to be honest, I clearly don't have the crystal ball with me, so to speak. So we are clearly expecting gradual recovery throughout the year starting mid-2020. To what extent we clearly have a good view on the overall development? Here, I'm talking not about the rest of 2020, I'm talking about a more midterm view of the COVID impact and the overall market circumstances in exactly 1st of October 2020, to be honest. Basically, simply answer to that, I don't know really. So clearly, we will look into that. And we have to anyhow. Maybe just to remind you, as a regulated bank, if we are about to pay dividends, we have to send some documents to the ECB, providing with our midterm outlook, whether even under stress scenarios, we are okay with capital ratios, et cetera, et cetera. So that's what we are doing regularly every year. And in normal times, we receive a quick answer from the ECB. I don't know whether they are prepared to take a quick view 1st of October 2020. So simply a lot of uncertainty around, no crystal ball at hand, and hence, as much as I'd like to, no precise answer from my end for that question at that point in time. But we clearly will monitor the situation. And if we are -- if we do have a better view and clue on market sentiment, overall market development and further prospects, we will look into that area again.

[Marc Oliver Hess, CFO & Member of the Management Board]

Yes. Thank you, Herr Hein, for your question. Clearly, we did deduct a dividend share from our regulatory capital for Q1. So we followed our dividend policy. You can see that on Page 62. So this is what we did. Please don't ask me with a consolidated net income of EUR 2 million, of whether it was 50% or 80%. I know that is an interesting question, but still in terms of dimension, that doesn't make the difference. I think it's obvious and clear that regarding dividend policy, we have to answer this question, how much it could be when we have learned more about the crisis when we have a better view? And today is not the time to talk about policies in that respect and...

[Hermann Josef Merkens, Chairman of the Management Board]

But is stays, the dividend part.

[Marc Oliver Hess, CFO & Member of the Management Board]

It is there and it is deducted, yes.

[Operator]

The next question is from Jakub Lichwa of RBC.

[Jakub Czeslaw Lichwa, Credit Strategist]

The first question is a bit specific and the second one is on funding. So starting with the first one, on the provision in the U.S., just so I understand how it works and the LTVs, et cetera, in terms of your approach, it looks like you've taken EUR 33 million, which is a bit high given that it looks like the exposure that went into default is EUR 59 million. So I presume, based on the composition of the book, the LTV must have been there under 60%. So the loan -- the collateral must have been worth EUR 100 million there or thereabouts. So again, why provision extra EUR 33 million there? It seems high. So that will be question number -- but again, this is just based on the -- a few slide disclosures. I may be missing something, obviously. And the second question is on funding. So your Tier 2 bucket is fairly high -- well, very high. You do have though EUR 300 million coming up for a call early next year, institutional amount. And you do have quite a lot of -- it looks like retail or small-size Tier 2. So the question is what were your thoughts there? What are you thinking? I mean are you okay with those smaller-size Tier 2 amortizing? Are you thinking of refinancing the 1 -- the Tier 2 callable next year? Any plan for this year would be helpful.

[Hermann Josef Merkens, Chairman of the Management Board]

So maybe if I start with your first question. Sorry, but I can't provide you with the latest or smallest details on the deal. But in general, you could imagine that we had a fairly structured deal in place with our sponsor, which was not just dealing with one single property. It was a 3-property portfolio. The deal encompassed various elements, including support of new tenants, which, by the way, have been underway to sign off new lease terms as well and as -- all that collapsed at the same point in time. We clearly took a conservative approach with respect to provisioning. So that is maybe the reasoning why it firsthand seems to be a relatively high number. At the very end, if I'm in the deal specifics, I would say it's a conservative loan loss provision approach on a relatively structured deal, which falls away, unfortunately.

[Marc Oliver Hess, CFO & Member of the Management Board]

Yes. And regarding your question on Tier 2, first of all, we have no plans to issue any Tier 2 this year. And yes, there are some callable next year. And here, I think it's the obvious statement. We are taking the decision by then based on economic and regulatory aspects as we have done for AT1 now. So we clearly assess the situation. And please accept that with the current uncertainties of COVID-19, it's really too early to give an indication of how we will proceed then next year.

[Operator]

The next question is from Philipp Häßler of Pareto.

[Philipp Häßler, Analyst]

Philipp Häßler from Pareto. I have 2 quick questions. Firstly, could you please give us the updated figure on your Italian government bond exposure? I mean update and I mean end of March. And secondly, in the outlook, you're saying that you consider a substantially positive operating profit to be within reach, how do you define substantially positive? Would it be a higher double digit? Or is substantially profit -- is a substantial positive profit a 3-digit figure already?

[Marc Oliver Hess, CFO & Member of the Management Board]

Yes. Thank you, Philipp, for your questions. To the latter one, I would say it is at least more than just a low double-digit million euro figure. And regarding the -- what was it?

[Hermann Josef Merkens, Chairman of the Management Board]

Italian.

[Marc Oliver Hess, CFO & Member of the Management Board]

Yes, the Italian government bonds. That is unchanged at, I think, EUR 629 million.

[Hermann Josef Merkens, Chairman of the Management Board]

EUR 625 million.

[Marc Oliver Hess, CFO & Member of the Management Board]

EUR 625 million. Thank you. EUR 625 million.

[Operator]

And there are no more questions at this time. I hand back to Hermann Merkens for closing comments.

[Hermann Josef Merkens, Chairman of the Management Board]

Yes. Thank you very much for the Q&A. And as I said in the key takeaways, I think we are well prepared to maneuver through that crisis. So we do have various business segments, as elaborated. Clearly, Aareon is well on track, and I think we could expect on that fairly more throughout the next couple of weeks and months. All in all, we do have a compelling strategy, which is not just encompassing the real estate structured financing business. And as I pointed out, we are well prepared to run the Aareon even though we clearly are managing the risk on the real estate Structured Property Financing side. Thank you very much from my end. And hopefully, we -- you'll really see us soon and at least we hear from each other very soon. Thank you very much. Bye-bye.

[Marc Oliver Hess, CFO & Member of the Management Board]

Thank you. Bye.