Aareal Bank AG

XETRA:ARL

Earnings Call Transcript 2018-Q3

[Jürgen Junginger, Managing Director Investor Relations]

Ladies and gentlemen, welcome to our Q3 conference call. I'm here with Hermann Merkens, our CEO, like always. And first time here on stage, Marc Hess, our newly acquired CFO. So both will lead you through the presentation and later, be ready for your questions. So, the stage is yours.

[Hermann Josef Merkens, Chairman of the Management Board]

Yes. Good morning from my end. I don't know whether acquired is the right word. Joined, recently joined or something like that. Marc, very welcome from my end as well. So we will lead you through the presentation. And as you know, I start right off with Page 3, which is a summary of our Q3 and, so far, 2018. If we look back, we've been a little bit surprised with all the uncertainty about the, although robust, economic environment, and we moved through that quite good. Present operating profit in Q3 is EUR 70 million. Q2 was EUR 62 million, so a little bit up quarter-on-quarter. Strong new business in Q3, which allows us to raise our overall full year new business target to EUR 8 million to EUR 9 billion. As you know, DHB is signed but subject to regulatory approval still, so we are heading against year-end with the transaction and with the approval as well, I hope and that's our expectation. Confirming raised operating profit guidance so far could be confirmed as I said. So in the more detailed, Page 5 summary again, but a little bit more detailed. And if I followed the noise this morning, I think there has been a little bit of maybe misinterpretation about the word net interest income. So net interest income is fully in line with our expectations. If I remember that correctly, I guided the net interest income in the area of quarter-on-quarter, EUR 130 million to EUR 135 million. And if you look into the quarter, the development, you see EUR 133 million; EUR 136 million, a little bit above; EUR 131 million, within the guidance. So we stay with our net interest income guidance. What we can't manage, which was a little bit driven by repayment as you already know, is the derecognition result. Separate line item under IFRS 9, significantly below previous level and to [ one of ] our estimate as well. So far, in October, we've seen some EUR 4 million again, so as I said during the press call, 2 months left, we will see what they will bring. At the very end, we will end up clearly below our expectations, which will drive the combined line item, net interest income and derecognition results. But more important, and I really want to point that out, net interest income is as we promised and that's stable. Loss allowance is within the expected range. Net commission income, above previous level has to be because Aareon is picking up, as you know, and stable on quarter-on-quarter. As you know, Q4 is the busiest months in the Aareon business and will be the busiest month in the Aareon business, and we are comfortable with our EBIT target.Admin expenses with EUR 107 million is slightly down quarter-on-quarter, including one-off effects, as you know, and I will comment on that in the outlook page as well.All in all, operating profit, EUR 70 million. And to be pointing that out, confirming our raised operating profit guidance.Tax ratio, 34% excluding DHB, for those which are doing the Excel after the call, excluding DHB because DHB, EUR 52 million, is a net effect which goes through P&L.So next page is the new business on Structured Property Financing, with some EUR 1.9 billion, fairly strong quarter. EUR 1.4 billion new business, which is good and above previous year. Margins are stabilizing after FX with 170 basis points, and we guided the gross margin into an area of 190 basis points to 200 basis points. So far, if I look into the deal pipeline, I think that we will end up above the 200 basis points, including the Q4. Q4 is volume-wise and margin-wise, promising.If you look into markets, transactional volumes, which is the right point to do so, we will see that -- or we'll see that the transaction volumes across the universe is going down. There's 1 exemption which is the U.S. transaction volumes. And if I look into more details in the market in North America, which is clearly driven by U.S. market, starting to see enough cross-border investments are holding up very well. Institutional players are buying, private individuals are buying, REITs are selling heavily. So that's, so to speak, the picture in the U.S. market, which is the more or less only market which is holding up with the [ sector ] investment volume. All the other markets are more or less on a quarter-on-quarter or year-on-year level significantly down. There are 1 or 2 exemptions there in major portfolio transactions, which I would not necessarily include into that.On a European level, who is buying, who is selling? It's cross-border business. Not that strong compared to the U.S., and here is included as a German institution is buying something in France that's included in the cross-border. Institutional investors are buying as well. Private individuals are selling, not that heavy at the recent years. And the REITs are more or less neutral selling office, buying into logistics. So that's the overall market picture, which is clearly a sort of explanation for our relatively low volume on Europe recognition income. If transaction flow is somewhat stalling, that clearly means that we will be more repaid at the lifetime end of loan and not right in the middle or at the very beginning. Consulting/Services. Aareon is on track, heading towards the EUR 37 million, EUR 38 million. So nothing specific to report on Page 8. Revenue volumes are picking up, as I'm pleased to report constantly in the Aareon business, especially in the digital product area. So here, we are developing really in the right direction. More details on the outlook page. On Page 10, net interest income. As I explained with our quarter development of the core net interest income or the pure net interest income, or the net interest income, we are very satisfied. It's fully in line with our expectations. And even on full year level, I would say maybe somewhat right in the middle between the EUR 520 million and EUR 540 million. Derecognition income last year was some EUR 50 million if I have that correctly, which clearly indicates that is a volatile line item, depending on markets behavior. It's not that we are not repaid. It's more whether we are repaid at the very end of the lifetime. And as I already guided, we do expect that the margin development will pick up in Q4. And hence, there's a good chance that we end up above our original guidance of 190 to 200 basis points new business margin.Loan loss provisions. You have the details on Page 21 and 42, 43, so within the normal quarterly variance I would say. And with the net commission income, you see the good development of the Aareon. And maybe I'm asked sometimes what is the research and development line item of Aareon; how much they are spending on research and development? And if you look into the details of the Aareon business, you have to separate -- if you compare that with others, you have to separate a little bit the consulting business from other line items. Other line items meaning licenses, maintenance, Software as a Service products and fees because usually, if you compare that with others, consulting is not a business others are so much following. And if you compare the research and development with -- percentage-wise with others, we are at some 21% with the EUR 34 million expenditure on research and development. And clearly, that's one of the tasks we do have in mind, whether that is enough to support the future growth and how one could match that with M&A activities. So a little bit more explanation on Aareon numbers at that point in time, and we should expect that we will report continuously more detail about turnover -- areas of turnover and, clearly, the aforementioned research and development line item.Admin expenses. Mixed picture, if I may so between transformational costs big picture, and the one-offs between transformational costs and reversals of provisions. More or less, netting, if you like, transformation costs are now at EUR 12 million. Original plan was EUR 25 million. So I would say you should not expect that we spend all the rest in Q4. It may be that the one or other project will simply be switched into 2019. We've done a lot, and we are on the way to do a lot in 2018, but the [ one-off ] will simply switch into 2019, more on the outlook page. Reversal of provisions is somewhat an offsetting effect for the low derecognition income. So we've been able to reverse provisions. The cause of that is somewhat two-folded. First of all, WestImmo, we've built up a lot of provisions for the restructuring of WestImmo and we clearly could reverse some of them during the year. Secondly, we've concluded our first so-called [Foreign Language], the English word, give me a second -- the agreement with [ the labor force ] with respect to the restructuring. We ended that in -- or we closed that in August. The composition of those which we've spoken to was a little bit different to our original planning, and hence, we could release some of the provisions that we [ built ] previously. Balance sheet and capital and funding position, I will hand over that chapter to Marc.

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

Yes. Thank you, Hermann. Good morning from my side. I'm happy to talk to you again, at least to those that I know from my previous role. And of course, I'm particularly happy to present Aareal's figures today in my new role as the CFO. So let's turn to balance sheet, capital and funding. First, on Page 15, you can see that the balance sheet has been fairly stable, only increased by EUR 100 million versus the second quarter to EUR 40.3 billion. So not much to comment on. Maybe a little bit on the funding side. You can see here that the long-term funds stand at EUR 20.1 billion. Here, we used our -- the favorable market environment before the termination of the ECB's purchase program to increase our funding activities. I give you some details on that later on. So let's go to capitalization. I would like to start at the right bottom corner. You can see here that we were able, again, to increase our Basel III core Tier 1 ratio quite substantially by 0.9 percentage points versus the second quarter to 20.8%. The main effect here is the first-time application of the advanced IRBA for the WestImmo corporate portfolio. That resulted in a RWA decrease of more than EUR 500 million, increasing the core Tier 1 ratio. However, due to the output floor of 72.5% in Basel IV, that didn't show any effect here in our Basel IV ratio, so, as you can see at the left part of that chart, the Basel IV RWA even increased slightly by EUR 160 million versus the second quarter. Here, please remember that it was explained several times that line of portfolio shifts around the 60% LTV threshold lead to a cliff effect regarding the risk weight under Basel IV. And despite the average LTV of new business being down in Q3 to 58% versus 61% in the second quarter, we had some new loans just above this 60% threshold, which finally resulted in that little RWA increase. The Basel IV ratio as such, therefore, slightly adjusted to 13.4% versus 13.5% in the second quarter.Anticipating your curiosity regarding our stress test results, I would like to point your attention to a slide that we included in the Appendix, so please go to Page 46. Obviously, as you can see here, where there are no figures, we need to make some disclaimers. First, as you know, our results are not published by ECB. And secondly, we are talking about preliminary calculations that we haven't yet -- that haven't yet been approved by ECB. So that's the reason why we cannot disclose any numbers here. However, as you can see in the chart above, even in the year with the highest depletion, we will be above the SREP requirements, fully phased. So if you allow me for some more disclaimers, I would even give you a hint to a calculation that we did under Basel IV condition first, and that goes for all Basel IV numbers in general. We calculated our RWAs based on the committee's framework published last December, taking into account that the EU implementation is still outstanding as well as the implementation of other regulatory requirements such as EBA, CRR 2 and, of course, the results for the TRIM exercise. So having that said and on that basis, assuming the full application of the hard test, again, in the year of the highest depletion, we would be above our SREP requirements, fully phased, even if we stressed the Basel IV ratio. So all in all, we are satisfied with that results as you can imagine, reflecting our strong capital position here. Going back to the main part of the presentation, to funding on Page 17, please. As I just said, we used the favorable environment in the third quarter and increased our funding activities here. You can see on that page that we issued 3 Pfandbriefe benchmarks in the amount of EUR 1.25 billion successfully, another EUR 200 million in private placement. And on top, we introduced the new asset class of senior preferred bonds that will be MREL eligible, and issued EUR 300 million in private placements. At this point, I would like to point out that we are way above the MREL thresholds set by SRB in both categories; that means the TLOF ratio and the RWA ratio of course.So that said, I would like to hand back to Hermann, please.

[Hermann Josef Merkens, Chairman of the Management Board]

Sure. So I'm on Page 19, with the asset quality and the portfolio view of commercial real estate loans, which is, I would say, the usual picture. Page 20, no major changes here. Just one remark to our new business in Q3, which was at 58%, as we clearly are below some of the levels you see here. 21, NPL volume a little bit down but more or less unchanged on a quarter-to-quarter basis. Treasury portfolio, no major changes here if I exclude the Italian rating change, which we already reflected here.So if I now go into the outlook. I may start, as of tradition, a little bit with the consensus, and will make some comments on consensus outlook 2018 and maybe [ the one or other hand ] into the following years as well. As I already said, with respect to the net interest income, to be honest, if I look into the line items, I would say we will end up somewhere in the middle of the original guidance, which we had between EUR 520 million and EUR 540 million for that year. If I look into the year 2019, I would say, if you forgive me, a plus/minus EUR 5 million, you are with the consensus of EUR 553.4 million and to be honest, our planning is not that accurate, but that's the consensus number. You are, with consensus number of 2019, spot on. As I said, if you forgive me a variance of plus/minus EUR 5 million, and we are still in the planning period. So 2018, in the middle of the EUR 520 million to EUR 540 million are in 2019 somewhat spot on. 2020 is a little bit too early to comment on, so I would say we do that during the year 2019. Next, derecognition income, you -- the average consensus number for 2018 is EUR 25 million. So we are now, end of October, with -- at EUR 21 million, which is fairly close to the EUR 25 million, but we will see what the next 2 months will deliver. And the overall consensus is along those lines on a EUR 24 million, EUR 23 million level, which is, I think, a fair assumption for the upcoming years.Allowance for credit losses with EUR 61 million and some EUR 70 million for the next years. Again, clearly, we will present here a variance but it's not too wrong, I would say, even for the next upcoming years. And with 2018, clearly, we do have to do 2 months, but again, here, my comment is not too wrong. Net commission income, I would say it's in the range we would expect in 2018; a little bit underestimating, but just a little bit, 2019 and 2020. We expect and pushing the Aareon business for a little bit more -- a little bit to understand that, more than I see here in the consensus.Admin expenses, as I already said, I would expect below our original guidance, meaning the guidance was EUR 470 million. Below means somewhat around EUR 460 million. So -- and here, you would see a kind of compensation effect for net interest income and derecognition income. The number for the next year is, to be honest, relatively, I have to admit, spot on again. And if I walk you through the numbers, you will see that we have to do a little bit on DHB. And if you include that, you would end up with the right full year number. But give me a second to explain that admin expenses a little bit more in detail. If I go into the 2018 numbers, and that's, if I may start again with the same as EUR 450 million, you know you have to add on EUR 13 million. So including Aareon, you would end up on a EUR 463 million level. Transformational costs, already planned -- or originally planned with EUR 20 million. As I said -- sorry, with EUR 25 million. As I said, I would be surprised if you would really end up with the EUR 25 million. You should assume for 2018 a EUR 20 million number. And last but not least, all in all, including the provisions I already mentioned, we would end up then on a EUR 463 million number because the reversal of the provisions is somewhat offsetting the TC number.If I now go into 2019. As promised, we are heading, bank-wise, towards EUR 420 million, EUR 430 million target in 2020. I may start with a somewhat EUR 440 million number. Adding again EUR 13 million on Aareon acquisitions and additional EUR 10 million on Aareon -- on the Aareon side caused by simply the fact if Aareon moves higher with revenues and with the cost-income ratio of somewhat 85%, that clearly has to be somewhat reflected in the admin expenses. So in addition, we're ending up, again, with the EUR 463 million but a variance in the composition. Bank is down by EUR 10 million and Aareon up with EUR 10 million. And if you include the aforementioned EUR 13 million, this is somewhat EUR 453 million. So transformational cost or projects, originally EUR 15 million, EUR 15 million, 1-5, if you add the EUR 5 million which we transferred from 2018, then we're ending up here with EUR 20 million. DHB, so far a little bit hard calculate, maybe a EUR 10 million to EUR 15 million number, so if I do the lower end, we are ending up with EUR 493 million admin expenses, including the DHB numbers. So as usual, at that point in time, a little bit more detail on admin expenses. And if I look a year down the road and do the same math, we are not satisfied at that point in time with the bank number. So we would end up with a run rate of some EUR 434 million, clearly including Aareon, excluding the both effects I already mentioned, M&A, EUR 13 million and additional costs to support the revenue increase. But we are still working on that. So I would say, you should expect a higher number that you have -- compared to the number you have in your consensus. But that is clearly a reflection, so to speak, of the Aareon business. And if you do a calculation on Aareon business, you should have in mind that they are operating on an 85% number and not on a 40% cost-income ratio number, which you should expect from a bank.So if I may do a short summary on the consensus comments. We will end up in our original guidance, maybe on the low end. If you do the math, you may end up with EUR 312 million, maybe a little bit above number. So in that respect, not that far away, the average consensus number of EUR 318 million. Admin expenses are fairly below the consensus number of EUR 475 million; it's more of EUR 460-ish number. Net commission income, a little bit above.And as I explained, net interest income you should expect in the middle of our guidance of EUR 130 million to EUR 135 million per quarter or if I translate that into the full year, EUR 520 million to EUR 540 million. Something left on the outlook, and now on Page 24, using the consensus slide that have been in front of me. Net interest income, as I said, in the middle of the range. Derecognition result until end of October, some EUR 21 million, 2 months left, or, let's say, 1 month because December, to a certain extent, a busy one but a very short one. Net interest income, including the derecognition income, you could do the math with my numbers. Loss allowance is somewhat towards the lower end of the guidance. Net commission income, I already elaborated on. Admin expenses will be clearly under the EUR 470 million, EUR 500 million guidance, more on the EUR 460-ish million direction. So that are the numbers you should calculate with.Portfolio size at year-end will be more towards EUR 27 billion. That's our expectation, then EUR 26 billion. And that will be the starting point for the year 2018 (sic) [ 2019 ]. And what we've done on the question of how to invest excess capital. A lot. I have to say we've done a lot, especially with Aareon and digitization, if I may start here. We've looked into various M&A opportunities, and the main question, it's a little bit -- if you end up with a 40, 50x EBIT multiple, whether you are exposed to some goodwill risks or whether you should really enter into a deal. So we are looking clearly in that area. But we are looking, at the same time, in research and development, whether we should increase that spending to support the future growth of Aareon as well. And here, I'm not talking about a EUR 45 million or EUR 50 million EBITDA. I'm talking about a EUR 75 million, EUR 80 million EBIT line [ or ] more the question how we could double the EBIT if I may, so from 2018. And if I look into the Aareon business, we've -- had seen 2 phases, if I may so. The one was to widen out the space for the ERP business on a European level. So we are now #1 ERP provider in that area Aareon and is active in, in Europe. We've put on digital products on a top layer on that. And for me, the main question was a little bit whether we are really understood and seen from our client universe as a digital product provider. Because if you do ERP business, the clients do not necessarily expect from you that you're doing the digital products by yourself. There, what they clearly expect is that you could integrate them. But the main question is if you develop them, whether you could really sell them into the client base. And I would say, we are very successful on that. And clearly, we are doing our planning but I would say, it's the right time to go into the third phase, meaning really to push that digital business either in the Aareon client base or in other areas where you see similar processes. So more on that during our preliminary figures we will present in February. And hence, we are really in deep discussions about the strategy around Aareon business as I teased a little bit into. A little bit of our excess capital, it's already invested in the DHB deal, [ clearly, ] once the deal is closed. And the portfolio volume is a little bit up -- that is the planning towards the end -- by some EUR 1 billion dollars, which would clearly eat up some of the excess capital as well. And as Marc pointed out during the comments on Basel IV, it's clearly -- yes, it's the kind of standardized approach. But on the other hand, you clearly have to manage your capital ratio on that end as well. So that's a little bit from my end and the outlook 2018, a short pre-sneak into our preliminary number, where we continuously are commenting on where we are on Aareal 2020, what are the next steps to improve our business. And I think especially in those volatile times, it's always a good thing to have a second [ lack , ] and we are clearly supporting that second [ lack ] and will improve that as well.So conclusion page, on page 25, short summary of what I already said. And Marc and I, we are happy to take your questions now.

[Operator]

[Operator Instructions] The first question is from the line of Johannes Thormann from HSBC.

[Johannes Thormann, Global Head of Exchanges and Analyst]

Johannes Thormann from HSBC. Three questions, if I may. First of all, on your net interest income outlook, you said that Q4 volumes and margins are promising. When will NII pick up again, in the next quarter already? Because the definition of stable for Q3 was probably a bit funny, looking at a more than 5% dec -- or 5% decline quarter-on-quarter. So will you expect NII to be picking up in Q4, or do we have to wait until next year, until the new business is helping to offset the breaking effects from this year? And secondly, looking at your fee income guidance and the limited growth in fee income so far, do you expect to reach the low end or the upper end of the fee income guidance? And last but not least, if you could provide some more details on the volatility of your LLP guidance or LLP? Because if you could provide us some details, how much is level 1, level 2 and level 3 provisioning versus H1 and H2?

[Hermann Josef Merkens, Chairman of the Management Board]

If I may start this with the latter one. It's really a volatile item. I will look whether I do have the details at hand at that point in time, but it's clearly relatively statistically driven, and that's, if you remember, as we started into the year, I said we would see how that will turn out with the more or less more volatile development of the loan loss provisions. Give me a second on that. But the fee income, I would say, that's a year -- and you may remember that I said we do have some -- or 2 projects which went difficult. We had some sort of setback in that line item caused by that 2 projects which lead to the new EBIT guidance of Aareon, and now the EUR 37 million to EUR 38 million. And hence, I would expect there that the overall fee income is somewhat at the lower end, which is -- but that is a net number because you have to deduct material costs from total revenues in the banking accounting scheme. With respect to net interest income, it's clearly always a question at what point -- and you pointed that out -- at what point in time we have the business on balance sheet. And the question mark really here is at what point in time we really will pay out, so to speak, the loan? And hence, we are hoping that we are able to unload that business very soon and we will clearly work on that. Normally, at that point in time, we will see, from year-to-year, a little bit of spillover effect into 2018. We've seen that in January, and we will see that in, hopefully, to a lower extent, at the end of 2017 as well. Your question with respect to the volatility of loan loss provisions, the best thing to look into is Page 66 of the German -- no, it's the English version of our quarterly report, where you see the transfer from stage 1 into 2 and so on, and that may, hopefully, answer your question. There is a detailed breakdown of the loss allowance line item.

[Operator]

Next question comes on the line of Britta Schmidt from Autonomous Research.

[Britta Schmidt, Partner, Spanish and German Banks]

I've got a question regarding Aareon. It seems like you are thinking about fairly sizable M&A if you're talking about these EBIT multiples and increasing the -- basically doubling the EBIT of Aareon. Am I right in interpreting that you could be talking about hundreds of millions of euros rather than tens of millions of euros? And related to that, it would be appreciated if, at some point, you could give us a better understanding of the business in terms of how it will transform Aareal Bank and also the way that it's been accounted for. That would be much appreciated. And then lastly, on the Aareon potential M&A spend, would this be a reflection of mainly cash spend or to what extent would sizable investment also impact the capital tied up in that business? So those are my questions on Aareon. And then just a clarification, please, on the 2020 costs. It seems like you are suggesting that consensus seems to be too low, partly because of Aareon, where we have to model a higher cost/income ratio. But can you perhaps again, give us the idea of a bridge there? I'm not quite sure I caught all of that.

[Hermann Josef Merkens, Chairman of the Management Board]

Yes. If I may start with the last question, to be honest, and I see that as well difficult with the provided numbers and we will be more precise on that at least during our -- presenting our preliminary results where we clearly give further guidance on how we will and intend to develop the Aareon business. And your -- second quarter, but I would guess that it's one of the effects why the segment expense line in the consensus is compared to our obtaining a little bit too low, let's put it that way. And we recognize that and clearly, will provide you with the number so that you could do your thoughts on that. With respect to cash spend, I would say we do have still powder left to do M&A activities in the Aareon area equity "light" so that we do just have to account for RWAs, but not to one-to-one capital deduction with the goodwill, so it's still some volume left. And with respect to the amount -- your first question with respect to the M&A activity. It's simply not just a, we're talking about not 2019; we are talking about the next phase of the Aareon development over the next years. And the main question for us is if I look into an M&A opportunity on the Aareon entity, you have to look into that, you have to integrate that and so on. We are doing that to expand our client base, and we've been very successful on that during the last couple of years or we're doing that to improve the technical setup/skills of Aareon. So overall, the main target at least is to use our existing client base to scale that business. And if I simply compare that with an R&D investment, I have to admit that if I do that on a like-for-like basis, what I do have to spend, as I do at -- with own development, it's below the M&A. And if I look into how that works out in the future, if I have to use the new product anyhow to scale into our client base, the difference -- or the management difference between develop the products that you own or do an M&A is not that big. May be that the risk is even higher if you do the M&A, because you have to -- this goodwill which is exposed to potential write-down risk whereas the overall spend in the R&D line item, most of that goes through P&L, and it's not that much left to clearly account that as an asset. So -- and that are the thoughts we are doing during the this-year planning process. And we will give you further guidance in at least -- at the latest in mid of February.

[Britta Schmidt, Partner, Spanish and German Banks]

Okay, that's quite clear. So can I just follow up with a fairly blunt question that's related to that? You have informed us in the past that you're going to make statements about the usage of the excess capital for distributions out of 2018 earnings and capital position. Do you confirm that you're going to commit to that in February?

[Hermann Josef Merkens, Chairman of the Management Board]

Yes, sure. We will do so in February.

[Operator]

Next question comes from the line of Tobias Lukesch from Kepler Cheuvreux.

[Tobias Lukesch, Equity Research Analyst]

Three questions also from my side, please. I want to touch on the deal pipeline again. Could you please elaborate a bit more on the geographic mix and also the product mix that you're seeing for Q4? And also maybe thinking ahead into 2019, would you expect that such differences, let's say, quarter-to-quarter, the drop we saw in Q1 to Q2, that remains flattish in Q3 and is up in Q4 again. Would you expect that we see such a scenario maybe again in 2019? And secondly, a question for Mr. Marc Hess, maybe also very blunt. Is there any comment on your side, maybe on your agenda, how you see or how you want to drive Aareal's business and the investment case in particular?

[Hermann Josef Merkens, Chairman of the Management Board]

So Marc, if you may start.

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

Yes, yes. Thank you, Tobias, for that quite broad question. Yes, I have to admit, I'm on board now for 5 weeks, so I think it's a little bit too early yet to say that I would really have ideas to adjust something in the business Aareal is doing. Obviously, I don't, yes. So after 5 weeks, I have to say that what I found was very profound, very professional, and I think we all have the agenda or book of work ahead, yes, that is really filled. So it's not getting boring. I think we are heading into the right direction. You have just heard about the outlook, especially, let's say, about the opportunities in the Aareon business. But also, if we are looking ahead into Q4, where we hinted that pickup where we can grow our commercial real estate business, I think it's also obvious that in these volatile times, it's always a challenge for a bank to manage your capital position. Though we are on a very comfortable level, we all know that we cannot exclude volatility from regulatory changes. So as I said, I think the book of work is well filled, and it's well set. And therefore, as just said, I think it's too early for me to comment on any adjustments I will see.

[Hermann Josef Merkens, Chairman of the Management Board]

Yes. Thanks, Marc, and I could say that he's well on top of everything. Even after 5 weeks, have got a lot of questions, if I may, so -- and even in the planning process, we've done a lot of work together to run that, and to really good things to get in here and yes, it makes a lot of fun.

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

Thank you.

[Hermann Josef Merkens, Chairman of the Management Board]

Thanks. So to the other questions. You asked about the new business pipeline. It's a composition of hotels, a little bit of Canadian business and some business even in Asia and maybe Australia or the famous Maldives, we will see how that will work out. And you asked about the net interest income "volatility." First of all, the new level of net interest income in Q3, maybe a little bit in Q4, was mainly caused by the actions we've taken throughout the first half year, which actions we have taken. So if we reduced our portfolio in Turkey heavily. And you think about a coupon of 4% or 5% on a loan, the loan might be not that large. But the effect in the net interest income is maybe a little bit -- not just a small number. Secondly, we've done some funding activities in Q3, which clearly have affected the net interest income as well. So there are -- the one or other part which is affecting net interest income in Q3 more than in the usual range. On the other hand, if I look into the new business margins, especially the Q2 was a fairly low-margin quarter new business-wise in Europe, which is clearly now running, rolling into our balance sheet in the earning asset base. And clearly, there are efforts underway to syndicate a large part of this business to other partners so that we are staying with the admin fees but not with the full exposure. So that, by the way, in effect, one could expect and should expect as a normal variance in the net interest income even in the next upcoming years. Hopefully, a little bit more mix. But clearly, we are not aiming to keep low margin business necessary at the lifetime end of the loan on balance if we have, on the other hand, the clear ability and, by the way, intention to syndicate that into market. So yes, a little bit of variance will remain. On the other hand, clearly, we are heading with our efforts towards the upper end of the guidance, EUR 130 million, EUR 135 million in 2019 as I already commented during my talk about the consensus.

[Tobias Lukesch, Equity Research Analyst]

Okay. And maybe if I may, if you're saying you're going to the upper end, seeing that pressure in the margin, I mean, we were down 270 from 220 in Q1. You say, okay, it's coming up in Q4 again on that more broader geographic reach, let's say, a higher share again in North America and going to Asia Pacific. However, is that also then -- are the funding costs driven here that you say, okay, we have also replaced here higher coupons and do the refinancing which allows us to write lower margins going forward, let's say, between 170 and 190 bps in 2019, 2020?

[Hermann Josef Merkens, Chairman of the Management Board]

No, it's, so to speak, with respect to funding costs, not on the single deals, but from a liquidity perspective, the other way round because clearly, we used that favorable environment, especially in Q3 or in September to do a lot of covered bonds, which filled in our liquidity reserve. And we are now using that to refi, so to speak, our business. So from a pure funding cost perspective, I would not necessarily see that we see a relief on the funding cost side as such. And I explained the effect in Q3. But on the other hand, as I tried to indicate, the normal variation in the business simply drives, from time to time, business margins and -- or low margins and hence, the net interest income. So -- but the business competition and maybe a little bit higher portfolio of -- I mentioned that number, EUR 27 billion, I think we are able to counter-effect, so to speak, much of the lower recognition income in 2019.

[Operator]

[Operator Instructions] The next question comes from the line of Michael Dunst from Commerzbank.

[Michael Dunst, Analyst]

Two remaining questions. First one refers to Slide 38 of your presentation. And for the supplementary payout of 20% to 30%, you have still the 2 prerequisites: no material deterioration of the environment; and no attractive investment opportunities. Do you see these 2 prerequisites to be still fulfilled as of today? Or in other words, is it realistic to assume then a total payout of 70% to 80%. And second questions concerns your planned acquisition of Düsseldorfer Hypothekenbank by the end of this year. Can you give us some guidance about the CET1 ratio impact? Is it neutral or slightly positive or slightly negative? And also, in terms of the pretax profit, the impact that we can expect from Düsseldorfer Hypothekenbank next year, you said that the cost base will be affected by EUR 10 million to EUR 15 million next year from Düsseldorfer Hypothekenbank. Does this include restructuring expenses and is this then offset then by revenues? And what is the overall pretax profit impact from Düsseldorfer Hypothekenbank in 2019? These are my 2 questions.

[Hermann Josef Merkens, Chairman of the Management Board]

Yes. If I may start with DHB. And clearly, the -- we have simply to unload the business of DHB, and clearly, we are trying, if I may so, to book what we can in 2000-and-what-is-it -- I want to be honest -- in 2018. With respect to restructuring, a little bit -- in that respect, a little bit different to the previous cases because here, it's more or less very clear that we will do a rundown, and hopefully, very quick integration of the banks. It will happen in 2018. We are still waiting for the regulatory approval, as I said, but still expecting the -- that to happen in 2018. So hence, we are left, so to speak, in 2019, more or less with the admin expenses, if I may, so I would not expect that much of leverage in the net interest income from that transaction, so we will not see a full offsetting effect of the EUR 10 million. But there will be maybe other effects which will compensate for that deal in other line items. But I will comment on that a little bit more in detail during our preliminary calls. So at least, on a net basis, it could be really net, meaning distribution to shareholders. It could be neutral on a P&L operating income side, I would say, a low single-digit number negative. So...

[Operator]

The next question comes from the line of Philipp Hässler from equinet Bank.

[Philipp Hässler]

Shall I already start with the question or I had the impression you wanted to add something more?

[Hermann Josef Merkens, Chairman of the Management Board]

No, I have finished, but if Michael is okay with the answers -- but you should go ahead and if...

[Philipp Hässler]

Okay, okay. I'll go ahead. Okay, Philipp Hässler from equinet. I have one question on Italy. The NPLs declined further quarter-on-quarter. I would like to know how you see the current situation in Italy and whether you are -- whether you've a good feeling that you will be able to further reduce the NPLs in Italy or whether you see some headwind for the coming quarters? And could you please also give us an update on your Italian government bond exposure and the average maturity?

[Hermann Josef Merkens, Chairman of the Management Board]

Yes. If I may start with the average maturity, I think no major changes there, although we are running through the portfolio, but Marc could give you more details on that. So we've not bought any Italian bond or sold any Italian bonds so far. The other question with respect to NPLs. We are clearly still working on some loans and we've had already a relatively small but, from a management [ intention ] perspective, good reduction in Q3. The rest is really a little bit hard to predict how the overall situation will -- or whether the overall situation will lead to major complex views on Italy. As always, there's a discrepancy between what is really going on, on the ground and whether the overall political noise level has an impact on that in Italy. Although I have to admit that the overall economic numbers of Italy, if I leave aside these budget discussions, are, I would say, at least a little bit cloudy. And clearly, that could have a long-term effect or even mid-term effect on, on [ LTV ] which we are clearly monitoring and questioning ourselves whether we should do new business in Italy or not. But that's more the mid- to long-term effect we are looking into. Short term, we are following the political debate as everybody's doing.

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

Yes, Philipp, regarding your question on the government bond portfolio. I think you're well aware that we have roughly EUR 1 billion outstanding here in Italy sovereign bonds. 20% will mature within the next 5 years, and the remaining thereafter.

[Operator]

There are no further questions at this time, and I would like to hand the conference back to Hermann Merkens, CEO, for closing comments. Please go ahead.

[Hermann Josef Merkens, Chairman of the Management Board]

Okay. Thank you very much for your questions. And short summary from my end: net interest income, as I said, in the originally planned bandwidth of EUR 130 million to EUR 135 million quarter-on-quarter or EUR 520 million to EUR 540 million on a full year basis. Derecognition income -- income not at our -- in our hands, clearly, below our original target, but we clearly aim and are on the way to manage net interest income further up, as indicated, with different measurements. And the pipeline for Q4 is promising. So I do expect if all deals are rolling in, slightly better and above guideline margin result, which is, I think, positive. Admin expenses, fairly low on a full year basis in 2018. And I commented on the 2 expected -- to be expected admin expenses on 2019 as well. So all in all, robust figures. And as I pointed out as well, we are clearly looking heavily and intense into the Aareon business as the driving force for digitization and digital business. And we are clearly doing that with the aim to bring up the EBIT mid- to long-term not marginally, substantially up, double that. That's the overall goal. Thank you very much for your attention. More from our end in the call as we are presenting our preliminary figures mid of February. Thank you very much.