Deutsche Pfandbriefbank AG

XETRA:PBB

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the Deutsche Pfandbriefbank AG conference call regarding the Q1 results 2018. [Operator Instructions] Let me now turn the floor over to Walter Allwicher, Head of Communications.

[Walter Allwicher]

Good morning, and a very warm welcome to our Q1 results call. We appreciate your time and your interest in the company. Here with me is Andreas Arndt. Andreas will lead you through the presentation and will be available for your questions once the presentation is concluded. Andreas, please?

[Andreas Arndt, Chairman of Management Board, CEO & CFO]

Yes. Thank you very much. Good morning, ladies and gentlemen. Welcome to our first quarter results 2018. All in all, I think good news with regards to our first quarter performance. Operating trends are solid, portfolio quality remains high. Our strong capital position provides sufficient buffer for challenges to come, and our strategic initiatives are well underway. The highlights were, first, PBT, which comes in at EUR 48 million in first quarter '18, slightly up year-over-year. For you to remember that first quarter '17 was supported by some positive one-offs, which means that first quarter '18 is a bit stronger than it looks. What have been the underlying drivers, strong NII, plus 10%, significantly reduced funding costs were one of the reasons, the higher average strategic financing the other one. The LLP did stay low with a release of EUR 4 million and operating costs were low levels, in line with expectations and basically, reflecting a baseline effect after some investments which we took in third and fourth quarter 2017. No major one-offs this quarter, except for one, which you know, but which is not a one-off because it comes back every year, and that is the bank levy, which is booked in first quarter for the entire year. So all in all, I think good results to start into the 2018. Net income is -- net income after tax is EUR 39 million or EUR 0.25 -- sorry, EUR 0.29, there's a difference, EUR 0.29 per share in the first quarter, which translates into return on equity after tax of 5.4% or pretax 6.7%.In our new business activities, we continue to be selective, and we did stick to our risk standards. New business volume reached a solid level of EUR 1.8 billion after strong fourth quarter, very strong fourth quarter, and against EUR 2.4 billion in first quarter '17. I may remind you that we indicated -- with the full year forecast, we indicated we're more cautious driving in new business in 2018. And as such, I think REF new business at EUR 1.7 billion against EUR 2 billion the previous year quarter, I think, is exactly in line with what we intended. Very gratifying is the development of average gross margin on new business, which is up to larger than 170 basis points after 155 basis points for the full year 2017 and 160 basis points in the first quarter '17, which is the result of more restricted and selected approach in new business volumes and clearly the result of low volumes and low leverage lending, which we deliberately kept back the first quarter '18, which does not mean -- also to be clear and frank, which does not mean that we may have some more of that coming in 2018 in the latter half. The financing volume is up. The increase in real estate financing with EUR 800 million overcompensates the decrease in value portfolio, which has gone down first quarter with EUR 200 million. We also were benefiting from lower prepayments this quarter in terms of volume development, and of course, naturally from the higher investment volumes which we had, and which we did see in the fourth quarter.On funding, we collected long-term funding EUR 2 billion last quarter, first quarter, with cost, again, significantly down against year-over-year averages. We come back to that. Capitalization is further improved. Main reason is the positive IFRS 9 first-time application effect, which did add EUR 109 million net of taxes to the equity, which brings me to Page 5, which is the usual structure of our P&L and the volumes and a quick overview development. I will not dwell too long on that, 2 or 3 remarks about this. First of all, the figures on the respective right-hand side is according to new structure IFRS, so that the order of line items as being required under IFRS 9 being adjusted. We'll come back to that. I'll give you a short summary of the major changes in terms of attribution of light -- line items as we go through. That's that one remark. The other one is content-wise, as mentioned, strategic portfolio is increasing further. So we've steadily evolved and steadily built up the strategy portfolio. And the other point I would like to make before I come to the respective data in more details, the cost-income ratio, which you see, does not only include the general admin expenses but also depreciation according to the new IFRS schedule. It's been changed in terms of computation in line with IFRS 9 requirements, and the bank levy is now being removed from the calculation of the cost-income ratio. All in all, as I said, EUR 48 million before tax.Before we go into details of the profit and loss, let me dwell a minute on the highlights of commercial real estate markets: where are we, the famous crystal ball question; how far we have advanced or we are advanced in the cycle; are we still peaking; are we beyond peaking. Now those are not the questions which I will answer straightforward, but I will give you sort of a situational view on where we see markets. The first point is, and that talks to the graph on the Page 6, upper left-hand side. The surprise in fourth quarter was despite forecast going a different way, the fourth quarter of 2017 was relatively strong. And we basically see similar development in first quarter based on seasonal adjustments. The interesting point as far as the first quarter '18 is concerned is that while transaction volumes all throughout Europe hold up quite nicely, the relevant part, the part which is relevant to senior lenders is actually coming down as we see more and more equity holders in transactions taking over the full transaction and paying out of cash, paying out of equity and not requiring refinancing through senior lenders, which basically means the cake is still there, but the pieces of the cake distributable to senior lenders and their friends becomes less, which in an effect says something about the competitive situation throughout in the markets.The prime yields are expected to remain relatively stable. Except for U.K. retail prime yields, they have increased. You can have very nice yields on retail shopping centers development in the U.K. just now, which is simply the reflection that nobody wants to go [ there ] presently. As long as we see that the European economy is in good shape and relatively robust, the fundamentals of commercial real estate markets will also hold in terms of occupancy rates, office take-up, and things like that. So all in all, it's good for investors. It is more difficult for senior lenders and there is one problem which we have in common with the investors, and that is we have to find good transactions and good yield. But that's something which I think many of us have in common. There is a sort of warning signal, and we depicted that on 4 charts on the left-hand side, that the BF quarterly indicator for real estate investment sentiment, if we sort of try to translate that halfway correctly, which gives an indication of where the commercial real estate markets are in terms of sentiment. And the point is that for Germany -- and that goes only for Germany, there's probably other indicators for other countries. In Germany, since 5 years, lowest figure being prognosticated for second quarter 2018. New business volumes are expected to decline, where refinancing cost tend to -- expected to increase. And as I said, the demand for prime properties, both on investor side as well as on bank side, significantly exceeds the supply. That's also been reflected in the 2 lower charts. The left one, after some increase in LTVs in 2017, we seem to be facing with a somewhat slower and more cautious approach from our friends and business partners. That's the one thing. And the other one thing is there's a change in expectation from stagnating to recently decreasing in new business volumes, which also indicates that sentiment certainly is apprehensive and slightly more on the negative side. But I think that's a very fair and very apt description of where the markets are these days.Coming to short descriptions of some of the countries. There [ are ] too many changes against what I said against the full year figures. France, the investment volumes remain on elevated levels. We see that in our pipelines and in the business which we transact. There's still very much Ile-de-France business. The office [ market ] is in a state of acute undersupply. Vacancy rate is below 3% now for Central Paris locations, which is sort of unheard of, and the rents are still slightly increasing -- stable and increasing, and prime yields, therefore, relatively stable.In terms of cyclicality, what we assume is that, and our French friends also assume, that due to the political situation 2 or 3 years ago, they're somewhat behind the curve in comparison to the European markets. So there is bit of a catch-up against the other European markets of 1 or 2 years they have still to accomplish.Nordics and Sweden. Now Sweden is different from Finland. Certainly, something Swedish people and Finnish people would subscribe to, but also in terms of commercial real estate. Sweden on the housing side is probably one of the hottest markets in Europe just now. With peaking levels, we actually see price declines of 5%, 10%, 15%. [ So far, it ] has no or very little impact on the commercial real estate markets, but we have to watch out there very carefully. Finland, again, for political reasons, was very much behind over the last few years, but 2017 was a record-breaking year. And Q1 has continued at record-level pace in terms of transaction volumes and prices. Retail and offices are the predominant class. Occupancy rates, they're going up, and vacancy, likewise, down. So it is a good market to be there, but it is a small market also to be clear about that.CEE. 2017 was up by 4%. Retail and offices are the predominant investments. The watch points are still -- and they remain the same as last year. We look out for logistics, but we look very carefully and cautiously out for logistics. And office { Warsaw ], on the one hand, has seen better quality in terms of tenants that add stability to the market, but there is an inflation of developments there and you have to be very careful where you put your money in. Otherwise, also see -- what we see is there's a much stronger demand for -- investment demand for Hungary and Romania, with Czech Republic being very solid and stable in the middle.Now U.K. markets are somewhat an enigma to me and to colleagues because on one hand, you have all these uncertainties around Brexit, on the other, we talk about stable markets, we talk about stable demand from overseas investors. It's very much still seen as a safe place to invest, especially with international buyers. And the market outlook is good, but it is vulnerable, in our view, to the Brexit outlook.So there's the one thing, which is a no-go area, which is shopping centers in the U.K. But interestingly enough, the pipeline which we see, the size of -- number of transactions which we see is very much stable and very much along what we've seen last year. Nevertheless, with the uncertainties many times discussed here, we tend to be more selective and take a very careful pick of the business.Are we missing out something, something which we will see in future? Presently, we go by the rule that, better safe than sorry. We keep back, which by the way is a major challenge to our people there because in terms of transactions which they present and transactions they cater for in the pipeline and the number of deals that actually get through, it's very difficult for them. It's a sort of sentiment and motivational point if you get your fourth and fifth and sixth decline in a row. The corresponding part to that is the U.S. business, where we meet relatively stable market conditions. We, though, saw a significant decline in gross margins over the last 12 months. That's being a little bit quieter and little bit more stabilized in the first quarter.Overall sentiment, very solid. And as you will see in a minute, there's a clear exchange between portfolio invested in U.K. business and U.S. business. So that's where we are on the business, on the countries, on the regions where we do business in. I would now turn to a little bit of sort of dry meal with one page on the IFRS implementation, and that's Page 8.Now that page is not comprehensive, it's not complete, it's indicative only. The only purpose is it should show you, from the sort of a custom view on our P&L according to IAS 39, the changes in line items in 2017, 2018 according to IFRS 9. And the first one I would mention is basically 2 effects which we see in financial reporting: one is the new accounting of financial instruments [ in prepayments ], which led to the positive first-time application effect of EUR 109 million, and which also has effects -- measurement effects in P&L -- on P&L and balance sheet going forward, which is not subject to Page 8 here. What is subject to Page 8 is the new reporting structure, which I'd like to explain in a bit more detail.Now the -- on the left-hand side, net interest income. And if you just for illustration purposes take the EUR 435 million for full year 2017, in future will be distinguished between the core interest rate -- the core interest income and what is being considered as more one-off items or nonrecurrent items under net interest income. And that's early prepayment fees. That's fees from pro rata commission income, which has been booked one-off in case of the prepayment. Those are gains and losses from the sale of loans or liabilities which have been extracted from the EUR 435 million, and they're being sort of redistributed into the right-hand side into early prepayments, or they're being rerouted into provisions related to interest and other nonrisk provisions.The second item is net income from financial investments. The provisions on securities will be expected to have been extracted and will be allocated to what formerly was loan loss provisions. In this case, if you go by full year figures, it's the minus EUR 4 million, the minus EUR 6 million, which adds up to minus EUR 10 million in full year 2017. And the other 2 changes is net operating income.Now in the past, we did book our bank levy in net other operating income. That's being extracted from this position also. The size of that position will be much smaller and much less significant. It's minus EUR 20 million which needs to be deducted from there. And the other point will be attributed to bank levy and deposits and protection scheme on the right-hand side at the bottom.General and administrative expenses. The figure you may well remember, the EUR 216 million divides up in 3 parts. One is the core general and admin expenses, which survives as a minus EUR 199 million in 2017 as a full year figure, but where depreciation is extracted and a certain amount for payment for deposit schemes, deposit insurance schemes, which goes into depreciation on the right-hand side or to be more correct, net income from write-downs and write-ups on nonfinancial assets and the position bank levy and deposit protection scheme.And the last one in this row with a certain significance is the agglomeration of any kind of provisions which are not risk related, but which were to be found in the past on net interest income or net -- other net operating income, general, admin expenses and so on. So that's a bit of a dry run to make clear for where we come and where we go, and to illustrate the structure of the P&L going forward.With that, I turn to Page 10. Without going into details here, it's a summary page for you only, again, to see the full picture with EUR 48 million pretax profit and the different line items. What I want to mention on this page is that some of the figures which you see here and some of the figures which we still come to, such as capital, will be subject to different computation when it comes to segment reporting. And we have made 3 changes which I would like you to know. One is the prepayment fees, which we did allocate in the past by some key according to volume across our bank, is now being attached to each and every single deal and goes with the deal into the right segment, meaning that 99% of all prepayments are most likely to land in real estate finance.Likewise, cost of liquidity buffer, which was an allocation thing before, now goes by transaction. And the equity is now allocated according to going concern view instead of liquidation approach, which basically means that we double up the capital allocated for real estate finance and reduce accordingly in the other segments. There is no change in allocation of operating cost to that for the sake of completeness.With that, I would lead you to Page 11, income from lending business. And we, for the sake of better overview, have combined net interest income, fee income and income from realizations on the same page, whereby the bar chart on the left-lower side is just net interest income. The short explanation of development of net interest income between fourth quarter '17 and first quarter '18 is we have 2 days less in interest count. That would be sort of taking things a little bit lightly. There's underlying developments which we need to look at. We see, and we saw over the course of the entire 2017 into 2018, a reduction of gross interest income, which was less than the reduction which we did see in gross interest expense.Gross interest income did come down by some 8% and gross interest expense did come down by approximately 14%. And that is basically a matter of asset margin on one hand, and funding margin and expiry of old fundings on the liability side. The interesting thing is that in terms of overall movement, the core business on the asset side has been delivering relatively stable returns to the gross interest income, whereas, on the other hand, those parts of the portfolio which are running down and which yield less have been having counterbalancing effects.Very gratifying is the solid increase in portfolio figures for real estate finance. We're coming from EUR 24.9 billion to EUR 25.7 billion, meaning EUR 800 million, which is 3% up. If you take the starting figure from the first quarter '17, it is 6.5% previous year quarter over actual quarter by which the strategic business has increased, partially, as I said, caused by very good results in fourth quarter 2017, partially caused by the fact that we saw less prepayments than in the past quarters. The usual suspects which are sort of spoiling the broth is the margin pressure, which I referred to; the value portfolio rundown, which takes out top line contribution; and still lower returns from reinvestments on the liquidity as well as on the equity book. Realizations, to make it complete, is EUR 9 million over EUR 9 million, so fairly stable with a different composition. We did see less prepayment fees in line with lesser prepayments, but we had some higher realization fees on -- and some fees or some income on the redemption of liabilities. That's it on Page 11.Page 12, on loan loss provisions, or as we call it now, net income from risk provisioning. Very uneventful, thank God. The 2 things to be mentioned is, any shifts between stage 1 and stage 2 computation of provisions caused mainly by, you may call it more technical effect. We have a shortening of duration of some papers below 1 year. That automatically brings down the rating and automatically brings down the modeled risk cost which we put against that. And therefore, we see a release between stage 1 and stage 2 movements of approximately EUR 5 million. And there is a counterbalancing effect on stage 3, where we provided EUR 1 million more on a single exposure going forward.All in all, I think, content-wise, the way it takes is very clear. We still have sort of general loan loss provisions which are model based, and which we refer pertain to stage 1 and stage 2. And we have the concept of SLLP, again, based on expected loss and not on incurred loss, now changing -- in terms of methodology, now changing from more likely than not to most likely and measured by scenario calculations.That brings me to Page 13, operating cost. EUR 44 million after EUR 45 million first quarter. You know that there was something in between, and that was third quarter and fourth quarter with a much discussed increase in overall G&A expenses. You know what the drivers were. There was investment in the U.S. There were regulatory projects. There were other strategic projects, which we did not comment on. There was the buildup of the CAPVERIANT municipality loan trading platform. We did include some monies for restructuring -- HR restructuring measures and so on. These things have been invested, so we're sort of back to base run rate 2018.But let me also say very clearly, there are more investments to come on strategic projects. There will be more costs on the U.S. side as we sort of hire people. There will be a fill-up of vacancies which we have on FTE throughout 2018. We have quite a number of vacant positions which we have to fill for the ordinary course of business. There will be further expenses on the regulatory side. And moreover and very significantly so, we do intend and we have every intention to spend more on digitalization projects as we go forward.So EUR 44 million is a good figure, but that's not the figure which we reckon with for the entire year.Now with that, on new business. As we talked about markets, I think I can sort of make it relatively short. First of all, on Page 15, I'd like to remind you on our full year's forecast. For business volumes, we did signal that we expect a significant visible reduction in new business to come in 2018. That sort of materializes in the first quarter according to expectation, with EUR 1.7 billion against EUR 2 billion last year.It is also in a way the evidence of the fact that there's some price volume curve -- or price volume function, which seems to be working. We were more selective both price-wise and risk-wise going forward. And that basically meant that the business which we did write and did underwrite, to a large extent, last year, the low-leverage lending, which always is also a low-margin lending business, did not materialize to the same degree in 2018 in the first quarter and did work positively on the margins.Now sort of preempting your question whether that is our new forecast for 2018 in terms of margin development, it's a clear no. Is it sort of a one-off? I would also say no. But as we do expect more margin pressure to come, the positive effects from funding -- from cheaper funding might be outpaced by the effects which we see on the asset side. So here, we have a good start, but I stay cautious on the forecast of the margin for the rest of the year.In terms of business mix, very briefly, very short. Germany, almost unchanged between new business and portfolio. And the 2 big changes already mentioned, used business now with 15% in terms of new business and 4% on the portfolio. As U.K. vice versa, changed from 16% on the portfolio to 8% in new business. The change in property types to office -- more office, more residential, basically reflects the riskiness which we attach to these asset classes.Public investment finance. That's the chart on Page 16. For the first quarter, I would call it below radar this time, with the tendency to a better showing in the second quarter. And I would comment on that business when we come to second quarter. So there's not much to be said about that presently.Value portfolio, likewise, is running according to plan. As I've said, we are down by almost EUR 2 billion first quarter against first quarter. So that's helping on all sides. And that brings me right into Page 19, on the internal ratings and the portfolio quality. Again, you see that you see not much of a change, and that's what is intended. The overall weighted LTVs on the portfolio stick to 55% all over. And you see the breakup further down the line on Page 19 with the usual small deviations between the different regions. I think, all in all, a good picture. And that's been reflected also on Page 20, where we come to total problem loans. We're standing at a total problem loan ratio of 0.4% presently. Problem loans according to regions, split up, you still find the 130 on U.K. and that is -- most of that is -- by far, most of that is attributable to U.K -- Estate UK-3. The Expert proceeding is still ongoing. I'm sort of sorry to not to be able to give you any news on that front, but the process is going on and dragging on.So the sunshine of the day is not only the good business as such, but it is the funding side of the business with a couple of good news which we have. First quarter, we see coming through what we -- which we saw approaching second half of 2017, and that is significantly lower funding levels going forward. And if you compare on Page 22, the levels which we have here first quarter, that's a minus 4 against plus 20 over Euribor, 3-months Euribor, for mortgage-covered bonds. That's 0 -- or 0 spread for public sector Pfandbriefe against 11 in the first quarter '17. And more significantly, on the senior unsecured side from 82 to 49. I think that shows the sort of the pricing drive which we have on that and where we can say that overall market spread did come down, but also that we can say we performed better than the market. The other element to be taken into account is that total funding, because we shortened the balance sheet, total funding was taken down and that also did contribute to the decrease of the liability part of the NII. We gave on -- on Page 22, we gave on the right-hand side a short and brief overview on the major fundings transactions which we placed. The tap, the EUR 250 million tap in January went to market with minus 18, just as a highlight. And the other thing which sticks out, of course, is the inaugural EUR 300 million Tier 1, AT1, which we did issue in April 2018 and which was executed like clockwork with a very good pricing according to our market review. We have -- for our peer comparison, we have one of the tightest and closest pricings, and I think we just managed to get the right timing spot to get a good pricing for a Tier 1 issue. Page 23 highlights the figures which I just gave. It also highlights that spreads are coming up a little again, and that volatility is increasing in February and March and, likewise, in April. That is not so much surprising given the overall interest environment. But what we have to keep in mind is as far as funding cost is concerned, refinancing cost is concerned, as long as these levels stay significantly below the average cost levels which we have on our books, we have positive contribution from new funding and from the roll-off of legacy liabilities, which we replace by cheaper funding. So some of the effect which we've seen in 2017 and first quarter '18 will prevail also in 2018 [ also ]. The big question is, will the benefit coming from that effect sort of supersede or [ comp ] the pressure on the asset side. On capital, capitalization remains strong. The key difference on CET1 is the first-time impact from IFRS 9 with EUR 109 million, together with a sort of interim profit, is EUR 120 million, which we take to our books. And that brings us to CET1 of 18.8 against 19.2 in 2017. And the own funds ratio increased to 23.5 against 21.9. SREP requirements presently unchanged against what we communicated last time. Page 26 basically recapitulates what we have already discussed many times, and shifting or focusing a little bit more to economic view and rating as 2 other determinants of capital ratios and capital requirements as we see it. We did discuss extensively the regulatory view, the Pillar 1 view as sort of a waterfall from the present state of capital ratios into ambition level plus management buffer being triggered by the still outstanding results from targeted review of internal models from cyclical risks as we see it, and the Basel IV estimations as we put it behind our risk weight estimations. And of course, we'd like to grow a bit. That's also been encapsulated. So that argument, I think that direction still holds. What comes on top and which sort of underpins the cautious approach which we have to capitalization is the economic view, which more and more becomes important from a regulatory point of view as the second view on capital, translation of capital against economic view, and where we gave you 2 or 3 figures here. The available financial resources, which is basically the capital side, against the economic capital calculated against the risk parameters of the bank. The point is why is it becoming more important? It is the sort of the old gone concern view on the bank and becomes more important because regulators have voiced concerns that Tier 2 cannot and should not be included in future. And that's the difference between the 3.2 to the 2.5, which you see on this graph. And that's a significant sort of significant reduction of the utilization room which we have on that particular parameter. The other point is rating is dear to us. Our rating is very dear to us. Standard & Poor's rating is dear to us. And one of the key drivers of Standard & Poor's rating is the RAC ratio. And we've always been seen as being able to fulfill the 10% ratio, but we have always been hovering around the 10% and would like to make a clear statement towards rating agencies that we also can perform above the 10%, and that's one of the key reasons why we did go for the AT1 issuance last month. And the same direction is capital structure optimization. That's still a Pillar 1 issue. That is also important in terms of overall compliance with not only CET1 ratios, but with the capital stack which lies behind that, and now the first time we fulfill the 1.5 regulatory bucket with this new AT1 issue. And by the way, and I think of interest to you all, we also give more cushion -- give more buffer for MVA calculation not on only CET1 basis, but on total capital basis. And MVA is the amount which determines dividend at the end of the day. So all in all, I think a very consistent picture in terms of overall capital planning going forward, being prepared for regulatory changes and challenges as much as for business growth. With that, I conclude my presentation to you. We are -- if I may summarize, I think we are well on track for 2018. We leave full year guidance unchanged, simply because there are a number of elements which advised to be cautious. It's the ongoing competitive market sentiment, which I tried to depict to you. We also expect that there will be diminishing support for funding cost. And on the cost side as such, the general admin, as I said, will see a certain pick-up throughout the year. That altogether sort of keeps us well within the guidance which we gave early on. But what is likewise important is we keep to our strategic initiatives. We will gear up on these strategic initiatives. We think we should see and will see more substantial business in the U.S. coming through second half once we are fully established there. We'll open the representative office in due course. That's the 1 block. And the other one is digitalization, not just because others do it and not just because it's the fashion of the day. There is a clear necessity that we engage in digitalization for reasons of our own efficiency, for reasons of client loyalty and making processes with clients more efficient, and for reasons of developing new business formats with new clients such as the platform CAPVERIANT for municipality loans, which we are in the process of developing, which we expect to launch in May 2015 -- 2018. There is a mistake there. That's the key strategic issues which -- where we have our eyes on, and that's I think the bits and pieces which bring us forward in 2018. With that, I conclude my presentation. Thank you very much for your attention. I'm happy to take your questions.

[Walter Allwicher]

Thanks, Andreas. Ulrika, can you please open the call for questions?

[Operator]

[Operator Instructions]

[Walter Allwicher]

First question or set of questions comes from Nicholas Herman from Citi.

[Nicholas Herman, Assistant Vice President and Analyst]

3 questions, please. Firstly, the additional Tier 1 issuance, sorry if I'm being a little obtuse here, but I'm still not sure I fully understand the rationale for issuing the AT1. I understand it was cheap, but Tier 2, it was even cheaper. And especially when you're looking at your AFR, that's also on a gone concern basis. So again, Tier 2, from what I can see, still seemed to make a bit more sense. Secondly, on capital -- sorry, again, if I missed this. My understanding from last quarter is that you would have -- the benefit of EUR 109 million was from adoption of IFRS 9, but it might have been offset by some provisions for Estate UK-3. Was that -- clearly, that was mistaken. So I think then there were no provisions for that. And then, finally, just on funding. Last year, you prefunded yourself very heavily in the first half as spreads it turned out were, obviously, a little bit too high than was needed. How much of your funding have you now done for 2018 as of the end of the first quarter? And as part of that as well, you also mentioned that your total fundings have been taken down. Can you expand on that? And are you complete with that reduction of funding?

[Andreas Arndt, Chairman of Management Board, CEO & CFO]

Okay. Now on AT1, very clearly, there are 2 or 3 reasons and they are not only cost reasons, but they are also cost reasons. One is on the economic view. We are losing EUR 700 million potentially, and probably losing EUR 700 million Tier 2, and AT1 is being seen as a proper replacement, not to the full extent, but to some extent. That is one thing, and the other thing is rating. As you may remember, we have a "split rating" between senior [ unsecured ] and senior nonpreferred. And the senior preferred ranges -- rates at A- negative outlook, presently. Senior nonpreferred is BBB- on the other hand. We would like to keep that, and we would like to give more comfort to the market and to the rating agencies going forward that we fulfill the RAC ratio, fulfill the capital requirements. And by the way, which is not on this page is, it also has a beneficial impact on other ratings and other rating agencies when they look at us. So...

[Nicholas Herman, Assistant Vice President and Analyst]

So you're saying that your CET1 of 18.8% and a leverage ratio without AT1 of almost 5% is not enough to support those ratings?

[Andreas Arndt, Chairman of Management Board, CEO & CFO]

Well, the rating agencies, especially Standard & Poor's, do not go exactly by the regulatory ratios which we set up. They have -- the RAC ratio is something which is proprietary to what Standard & Poor's is doing and they have their own systems in calculating that. They probably would say 4% or 4.5% leverage ratio might be enough, but that's not their measure by which they go. Basically, what you see on Page 26 is nothing else than the complication of steering capital these days between regulatory view on going concern, gone concern rating, capital optimization, MVA view and all these things. And the problem is you don't have a one-on-one sort of liking of parameters, but you have different ways of looking at it. And if we were to have, for instance, Moody's on top of it, they have, again, a different way of doing the calculation. That is something which is the underlying message on Page 26. There are different constituencies and different parameters and different measures to be considered, which we make part of our capital strategy and capital, yes, capital strategy going forward. So that is on AT1. On capital as such with EUR 109 million. Now the EUR 109 million is the net after some first-time application effects on loan loss provisions. And that's what I said, that's a pretax figure of EUR 32 million together with EUR 158 million on measurements and classifications. And that taken together, EUR 158 million minus EUR 32 million, gives -- minus taxes, gives EUR 109 million. And that basically includes some onetime, first-time effect on UK-3. Not -- as I repeat myself, not because we think there is a different risk background, but because there is a different calculation of risk cost. It's a difference between the incurred loss method to the expected loss method. And it's a difference between going by expected loss calculated on scenario versus more likely than not, yes? And that did imply that we had to change the computation. And there is an amount, which we did not and will not disclose, being encapsulated and being incurred within this EUR 32 million pretax figure. So that's, perhaps, how the capital side did come together. Now on funding. As you know, the markets do their funding in the first half. And the way we go into the funding is we set up a funding plan according to the asset side of the business and according to the maturity profile which we find on the liability side. So there might be a situation where you have a relatively high indication of needs on the asset side but very little which rolls off of this year, which basically means that the delta between the 2 can be a relatively small figure. And vice versa, you may have not much to fund on the asset side, but you have lots of old legacy volumes rolling off, which you have to fund. But a strong indicator by which we set up our plans is the development of the asset side. And we go by the plan, which we normally and usually have decided on September, October the previous year, with our expectations on new business and that is what we were going out to fund. And typically, the most liquid markets you find January, February, March. And this is where you do the lion's share of your funding. And that sort of repeats itself every year. Now that is being corrected according to what we see coming in, in terms of new business and what is our estimate for the remainder of the year, yes? And that is something which we very closely monitor. And by May, April-May, we start sort of readjusting on that side. Now we have a special point for 2018 and that is referring back to what I said earlier, preferred or not preferred. We do solidly assume that we will be able to issue non -- sorry we will be issuing preferred by the second half of 2018. And in that case, I think we keep our powder dry because we still expect a certain price advantage between nonpreferred and preferred. So it's not that we don't get it. It is what -- we're cautious in view of what happened second quarter, but also in terms of the reduced funding required from reduced forecast on new business levels.

[Nicholas Herman, Assistant Vice President and Analyst]

Okay. I think I understood that. But it sounds like you have done a significant portion of your funding, though, for the year there. Obviously, as you said, with the caveat that you will obviously adjust as the -- depending on your outlook for new business volumes. Hello? Hello?

[Andreas Arndt, Chairman of Management Board, CEO & CFO]

Nicholas, you hear me?

[Nicholas Herman, Assistant Vice President and Analyst]

Can you hear me? Yes. Sorry, my line went dead a second.

[Andreas Arndt, Chairman of Management Board, CEO & CFO]

Yes, I think with EUR 2 billion, we did a significant portion given the profile which we have on the liability side and the new business which we write and expect to write. But we hold back something in reserve for the second half because of the preferred issuances which we intend to have on the deposit side.

[Nicholas Herman, Assistant Vice President and Analyst]

Just one follow-up there. It just sounds also -- obviously, you mentioned as well that your retail volumes have continued to tick down a bit, again, just not something that you're -- that, presumably is overconcerning given it is a little more expensive, correct?

[Andreas Arndt, Chairman of Management Board, CEO & CFO]

Yes. I suppose so. Yes.

[Walter Allwicher]

We have a further question registered from Johannes Thormann from HSBC.

[Johannes Thormann, Global Head of Exchanges and Analyst]

Johannes from HSBC. Two questions. First of all, in terms of run rates. What do you consider a good run rate for the net interest income, the EUR 107 million without the EUR 9 million column in the old way early prepayment piece? Or do you see more pressure on that absolute level as well? Secondly, for your cost. You indicated that the EUR 44 million are not a good run rate. Should we expect a significant increase or just a modest increase in the next quarters? And what is needed to change the risk picture as you had those releases in stage 1 and stage 2? What do you consider to be needed there?

[Andreas Arndt, Chairman of Management Board, CEO & CFO]

Well, to start with the risk picture, I think we don't need to change it and we don't want to change it. But it is not easy to make forecasts on that because -- on the mechanics of IFRS 9, which we still have to get used to. What we say in principle is we expect more volatility on that item. We will see, as long as we have longer durations, higher PDs, higher [ LGDs ], we'll see higher PDs emerging throughout the year. We will see model-based adjustments to Level 1 and Level 2 risk cost. And that is something which can happen, and that's the reason why we stick to our forecast where we said we expect some 10 to 12, 13 basis points risk cost on our real estate finance portfolio. And we still hold on to that. So that's, I think in terms of guidance, unchanged. Now on administrative cost, the EUR 44 million is not a good guidance. What we said by giving a full year forecast was that we will stay below EUR 220 million. I was incautious enough to say I would expect that we would also stay below the EUR 216 million equivalent of last year, and I think that's a reasonable estimation. We will have more investments coming in the second, third quarter. We do want to build significantly on the CAPVERIANT platform as well as on the real estate finance portal for commercial real estate clients. And that is something which will use up budget in the second, third and fourth quarter to come. So in line with the forecast which I gave, EUR 216 million equivalent below, I think, is a good guidance, but much further I would not go. Now on the run rate, NII. I mean, I did ask the question myself, when is it that -- or how much of the positive effects from liabilities can we expect to [ comp ] and to make up for the negative effects which we still expect and still see on the asset side for margin compression going through. We do see, on our portfolio, 1 or 2 quarters which were very stable in terms of net margin portfolio development, but we also have to take into consideration that the new business margin, although improved, is still lower than the margin which rolls off for legacy exposure due to prepayments or repayments and thereby, there is a sort of watering down of the profitability of the portfolio on the asset side. Now I'm still very optimistic, I should say, I'm still -- not very optimistic, I'm still optimistic on the second quarter in terms of NII development, but I would expect that second half we'll see some reduction on the run rate. Full stop.I hope that helps a little bit.

[Walter Allwicher]

We have one further question registered from Philipp Häßler from equinet. [Operator Instructions]

[Philipp Häßler, Director of Research]

I have 2 questions, please. Firstly, could you give us some more details on CAPVERIANT? How does this platform work? What volumes do you expect? What type of business will go through this platform? And secondly, on the real estate. The lending portfolio went up quite nicely, 3% Q-on-Q. Maybe you could indicate how do you see the further development in the coming quarters?

[Andreas Arndt, Chairman of Management Board, CEO & CFO]

Okay. Now CAPVERIANT, if I start talking about that, it can be a long session, so colleagues know that. I will try to make it short. We've been working on this platform since almost a year now. What it is in essence is basically talking loans from communal counterparties, municipalities, regional governments and so on, which they in the past placed with Landesbanken, Sparkassen, other institutional investors, on a bilateral basis or by a broker in between. Now this broker in between becomes digital, and we tried to enlist the interests both of municipalities, regional counterparties, and so on, on one hand, and institutional investors such as insurance companies' funds, but also Sparkassen, also Landesbanken, to register on the liability side of the platform. The service which is being provided is basically an onboarding for municipalities. They post their requirements according to a schedule, which we provide. They can choose between 4 or 5 different loan types and they can choose between a number of parameters by which the loan is governed, interest, repayment, and so on. And that's been posted to the Internet page, to the web page of the platform. And those investors which did onboard can look at that, give a quote and can determine the course of [ auction ] of that particular loan. What comes on top is that both sides can either provide their contracts or they can take recourse to our contract, which we provide. The task of the platform is the matchmaking, setting a price and giving a full administration of the loan documentation and the payment thereafter. So there is a settlement function, which is also attached to that and which is against many other platforms which try to do similar things, the one distinguishing difference which we have. This platform over time does face significant volume potential in Germany, but also in other countries in Europe. The difficulty, as always in life, is always the next step which we have to take after we have more or less 99% finished on the technical side. The point is about onboarding both parties, and that will be a longer and tedious exercise. The volumes which we expect from that in 2018 is 0, yes? It's not that we're not making business there. But according to plan, the plan is 0 on that side, because we will need time and potential customers, both sides, will take time to get used to the platform to see some traffic emerging. And a platform becomes a platform if there are enough interested parties both sides. And that is something which we have to support by client acquisition, by relationship management, by reworking our platform according to the wishes of the participants and things like that. Ultimately, what I think where the money will come from in 2, 3 years' time is a platform which has a secondary market function, which has a Schuldschein trading function and things like that. And that's if we get a function where we can sell funds and things which are not solely related to public sector, but also may include some functions and some assets which are related to commercial real estate. So that's an evolutionary part -- or path which we go. It is, as always in life with investments, it's money out first. It is something which has a probation period, which we will watch closely, but is a business which we are -- where we have every intention to invest going forward this year and next year in order to see it flying. The other thing we should not be forgotten is the real estate finance portal, which we built for commercial real estate clients as an exchange of information on their loan business, on their development loan business, organizing data flows, giving information from the client to us and from us to the client. And that is more commercial real estate driven and something which we also will build out always according to the 3 sort of key headlines which I mentioned: efficiency, client loyalty for commercial real estate and trading platform for doing business. So that's on the CAPVERIANT side. On the lending portfolio, further growth, yes, we do expect further growth. We have to see how prepayments will come in and how much, say, the reduced amount of new business which we saw will work on the portfolio. As I said, there might be good likelihood that we will engage, again, a bit more in low-leverage lending second or third -- or rather third and fourth quarter, which is a business which is good for portfolio, good for keep. It's mostly long-term business, but we'll work on the margin side as we did see in 2017.

[Walter Allwicher]

Good. Well, we have no further questions registered. Hindsight is an asset that doesn't mean anything because, usually, when I start my lengthy farewell, that means that people will come back and ask questions. But -- which is actually why I'm stretching it right now. But there are no further questions. So let me take opportunity to thank you for joining us today. As I said, we appreciate your interest. And we'll be back with Q1 results -- sorry Q2 results in August. Thank you very much. Bye.