Deutsche Pfandbriefbank AG

XETRA:PBB

Earnings Call Transcript 2019-Q1

[Walter Allwicher, Head of Communications]

Morning, and a warm welcome from Deutsche Pfandbriefe. Thank you for taking the time to join us this morning and here with me is Andreas Arndt, CEO and CFO. Andreas will guide you through the presentation and will also be available for question-and-answer session afterward.

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

Yes, good morning, and welcome to our analyst call regarding quarter 2019 results. To put it briefly, I think we had a good start into 2019 where we see good levels at EUR 48 million, which is stable year-over-year and slightly up quarter-over-quarter. This is a good achievement, given the fact that markets do remain highly competitive and that the pressure on margins continues and goes on and that spread levels in funding market have increased year-over-year and that as every year, Q1 is always burdened with the bank levy. So all in all, we remain fully in line with our full year guidance of EUR 170 million to EUR 190 million. Let me say a few comments on the -- on the next page, what have been drivers of pbb. The NII is up 8.4% year-over-year reflecting a high strategic real estate financing volume, supported by still reducing averaging -- average financing -- refinancing cost. This is to compensate for somewhat lower income from realizations and moderately higher risk and admin cost. New business did reach EUR 2 billion, a solid level after a strong -- very strong Q4 and slightly up versus last year Q1 '18. However, interest margin on new business came in at a low figure of 130 basis points, but on reasonable and explainable or explicable grounds due to some temporary effects and more than usual low-risk profile new business, and as you would expect, I will come back to that point later on. We do expect, however, a solid rebound in margins to back to levels of previous quarters and all in line with our overall risk strategy. The strategic Real Estate Finance portfolio increased by EUR 1 billion or 4% in Q1 and a total of EUR 2 billion or 8% year-over-year. For the remaining 3 quarters, we would expect further moderate growth of our strategic portfolio in line with cautious guidance. Public investment portfolio stable in line with the old position and proposition, which we communicated last time while the Value Portfolio is down EUR 0.3 billion in line with the run-down strategy. The funding activities, however, are running at a good pace, did run at good pace and still continue to run at good pace, with a volume of EUR 2.7 billion compared against EUR 2 billion at the same point in time last year, with senior preferred -- new senior preferred now successfully established with the total volume of EUR 1.2 billion of which we did issue EUR 500 million as benchmark with a subsequent EUR 250 million tap, plus, for the remainder, private placements, which were also quite in demand. Even though funding spreads have increased year-over-year, the average issue and spread still is below maturities, which are rolling off this year and next year from our books, and we'll come back to that later on, but latest market development shows pleasantly reduced level of secondary market spreads on all senior preferred, again as we see later on. Capitalization continues to be strong with the CET1 of 18.8%, which provides an adequate buffer for regulatory and cyclical challenges ahead. So I think all-in-all, solid numbers, which we can present for the first quarter. Now going to Page 5. Highlights of financial overview. Let me put it this way. I'll just comment on 2 or 3 things. First of all, the portfolio development, which you can see on the lower part of the left-hand side. Strategic refinancing -- real estate financing volume of EUR 1 billion in addition to what we had last year, brings us up to EUR 27.8 billion as an end-of-quarter figure. That brings up the strategic portfolio -- the share of the strategic portfolio to 73%, which I think is a very reasonable figure and a very nice figure to look at. Net interest income holds up, as I said. The 2 other points I want to mention is 42% cost-to-income ratio, so we're resilient on that side, which is good. And pre-tax profit, ROE, stands at 6% and is above our guidance. As usual, at that injunction, I'll give a few comments on how we see markets and how we see market developments. Even though commercial real estate markets, and I'm talking to Page 7 now, although commercial real estate market environment remains highly competitive and challenging, fundamentals continue to stay quite solid for most of the continental European markets. In most markets, property yields continue to offer a pickup versus government bonds, especially supported by the latest soft interest outlook from the ECB, supporting relative attractiveness of commercial real estate markets and for sure extending the cycle. Transaction volumes in 2018, as you can see from this chart, did remain on elevated levels while we expected moderate decline in the first quarter and 2019, in total. Office rents and cash flows in some markets are still increasing, even in the U.K. they still remain mainly stable and that's also the forecast for the U.K. for the remainder of the year. Interestingly enough, vacancies remain on low level, prices remain where they are. Almost the same picture for the United States, fundamentals have remained more or less intact, even though rent levels have surpassed the levels experienced prior to the 2008 recession. Rents are still increasing in most of the core locations. But that's also to complete the picture and to be very clear and open. The soft indicators from our perspective are somewhat weaker and the instability indicators somewhat stronger. Investment volumes do not -- as far as we can see, do not increase further. But trend, in best of all cases, trend sidewards or moderately downwards. In our view, and not only our view, but the market's view, the yields on almost all locations and asset classes are on absolute lows, with the mechanism behind and the risk behind that which I described couple of times already to you. So I will stay with that today, and we do observe a number of individual dynamics, which are closely to be observed and to be reckoned with. One is, of course, the structural change in retail sector. And the other one is the still growing share of co-working space, which by the way makes up for the biggest tenant group in London and in New York. New York, if I remember correctly that used to be for years JP Morgan, now co-working space or WeWork, in particular, have taken over that position. The other one is the office take-up from the booming tech sector, which has increased significantly and as you know it goes down as quickly as it goes up before. And the last point is which we also spend time and diligence on is to see, whether we find hidden vacancies, i.e., long-term tenants with long-term contracts, which only need say half of the space and try to sublet, as we could observe in the London market place a couple of times. And last point, not to be forgotten, all political and economic uncertainties, especially, the things which pertain to and relate to Brexit and China, U.S.-China trade war. All that also needs to be taken into account. As I said it's another opportunity. We are standing with one foot on the [ shelf ] and the other one on the fridge.Macroeconomics, deteriorating macroeconomics do not help our business on one hand. On the other hand, the ECB policy of [ lot of ] money of low interest would still keep up interest in the asset class of commercial real estate and will help markets to move on. So all that in a nutshell gives us good reason to stay selective and cautious for the future, to focus on quality with regards to the finance properties where the stability of value is key with investors, which are able to refinance themselves and which have sufficient experience of the cycle. And last, but not least, to be stingy, be conservative on covenants which provide our backstop in any structure. Let me move onto Page 9 where you see the financials in one string. What I will do here is I will confine myself on to some explanations and items, which are not further detailed in the following pages that leaves NII, risk provisioning and operating cost to the following pages. Now the result from fair value measurement stands at minus 2, unspectacular figure, which basically is calculated from a negative pull-to-par of minus 5, which has been largely compensated by positive valuation effects, which resulted from decreased interest rate levels, i.e., fixed rate loans and syndication warehouse where the reduced interest over the first quarter did help in terms of valuation. Other operating cost, minus 1, mostly -- mainly driven by FX effects and depreciation, which is not part anymore of the general and administrative expenses, is now separate P&L line, driven by regular depreciation on tangible assets and amortization of intangible assets. It's slightly up because -- I think I mentioned that already to you last time because of a shorter amortization where we changed from 5 years to a more conservative 4 years depreciation period.Last, but not least, I already mentioned bank levy and contribution to the deposit protection scheme is as usual booked in the first quarter with EUR 21 million on the negative side. Now coming to Page 10, which is NII, which is up 8.4% year-over-year, mainly driven by the following factors. Our average strategic Real Estate Finance portfolio organically increased by EUR 2 billion year-over-year and that leaves us with a figure of EUR 27.3 billion on a quarter average, not quarter end figure, but quarter average, benefiting from a strong new business in 2018, especially in Q4. Funding cost continued to support NII as new issuance spreads are still below legacy cost of maturities, even though having increased in line with the overall spread widening in the market, which gives 20 bps to the Pfandbrief and 30 to senior unsecured -- on the preferred side. We again, managed to keep our average net portfolio margin stable year-over-year, which is the reflection of selective business approach and the growing share in our strategic portfolio. So if you look at segment by segment, you will see that average margins are moderately going down, but as the portfolio composition changes, the overall average margin of total portfolio is stable or even slightly increasing. Income from realizations, on that page, is with EUR 6 million. Net income from realizations is down EUR 3 million against first quarter 2018. The first quarter '18 did benefit from high realization fees and redemption of liabilities, while the prepayment or the fees for prepayments actually were stable. Page 11. Nothing really new to tell on risk provisioning, no additions to stage 3, only EUR 1 million net additions to stage 1 due to adjusted PDs and macroeconomic parameters, the latter mainly based on economic IMF forecast. Risk provisioning thus and so far remains well below our guidance. As you remember, our planning accounts were 10 to 15 basis points on the Real Estate Finance portfolio, which we stick to as it is still early days. Stage 3 coverage ratio, for the sake of completeness, stays at 18%, stable. Now that takes me to operating cost on Page 12. The operating cost development is clearly a reflection of our strict cost management despite the investments, which we have despite the increased regulatory costs, which we have. So general-admin remain on low level, slightly up from EUR 44 million to EUR 46 million year-over-year, and the increased spreads equally on personal and nonpersonal expenses. Personal expenses are up EUR 1 million and -- EUR 1 million up year-over-year and EUR 1 million down against last quarter last year, which follows the trend in FTE development. Nonpersonal expenses are driven by some project-related cost, notably on the regulatory side. Here, we -- especially with -- in view of the time frame on some of the projects agreed with ECB to speed up, required more external support and that is part of the explanation for the cost increase, which we have. All in all, I should say, we should -- we're able to take pride in having managed our costs by self-funding new investments and structural cost increases, and we have every intention to keep it this way. But as mentioned in our guidance for 2019, regulatory costs and strategic investments will continue to weigh on the overall cost levels as we go forward with moderate increases throughout 2019. So on depreciation of minus 4, I have already commented on. That leads us to Page 14 with new business and new business volumes, lower gross margins due to regional and product mix. Now that's a bit of a mixed bag and let me give you some more explanations to that. Total new business, as I said, is up EUR 2 billion, which is good. If you take a closer look, you will see that the quarter's new business composition is quite different from what we have seen in 2018 on average. As mentioned, we saw -- In the first quarter, we saw some temporary effect, that was a large transaction and that was a trusted and longstanding relationship which is still EP-positive but did drag on the gross margin significantly. But that was not so much the key driver. More importantly is that we had an extraordinary high portion of transactions with a lower than usual risk profile and respective lower margins, which did result in an average gross margin of 130 basis point. So what are the differences to the pattern or the structure, which we had so far and which we intend to continue to keep. Now first is lower average LTV, which comes in 58% in the current quarter and compares against 62% in the first quarter of 2018. And usually, if you take low risks, you also look at lower margins, and the same goes for low portion of developments, which we saw in the first quarter, that was almost down to 0 for the first quarter of '19. And in terms of regional as well as asset composition, we saw that the low ranking -- risk ranking parts of the portfolio did prevail, a higher share of business in Germany with 51% against 40% average last year and France 26% against the 13%. If you add up both, you end up with a figure, which is above 75% for that kind of business, whereas on the other hand, the U.K. business did figure only with 6% against 11% and CEE was down to 1%. And to put one more on top. As an explanation, also in the usually lesser risk category of offices and residential, we did book again, roughly 75% of the business together, whereas retail and logistics did reduce. Having said that, we would expect for the Q2 to rebound on margin, higher margins in line with previous quarters and in line with the business mix, which we have seen in previous quarters. And, of course, and that goes almost without saying, all in line with all of our risk strategy. So -- but that also implies that we stay cautious on U.K. and retail. And that also implies that we will carefully expand our U.S. portfolio share, but U.S. remains on the growth list -- on the positive list in the pipeline as a good indication for that. With regards to segment performance, on Page 15. I keep it rather short as all segments are reflective of developments and the drivers, which we also touched upon when I talked about group level. So strong NII, low-risk cost, remaining low operating costs levels. There's one thing I would like to highlight and that's the cost relief from Focus & Invest program, in particular, related to the reorganization of Public Investment Finance that is something, which we don't see yet here and that is something because of the reduction of FTE, something which will come through only in the second half of 2019. A few words very briefly, on Page 17. On the portfolio, average LTV is now at 55%, that's 1 point up, that's a development which you would expect given the portfolio growth and the new commitments having typically a higher average LTV than the 40 -- 54%. Otherwise, in terms of investment-grade share, things are stable and moving as before. There are no major -- no further changes in terms of regional spreads. Italy, you'll find described, there's no real change to that. So that brings me to NPL. And here the key message is it's also unchanged at approximately EUR 350 million, which returns an NPL ratio of 0.6%, workout is unchanged. The 2 U.K. shopping centers, we did mention last time, they're developing positively. So we would not expect any further negative surprises from that position. UK-3, no news, I'm sure there will be questions later which I cannot answer, as usual. So we leave it at that. The funding is again an item on the positive list. With regards to funding, we had a very good and very strong start into 2019. In total, we raised new funding of EUR 2.7 billion in the first quarter, which is more than the 1/3 higher than last year. We did size the new volumes a bit on cautious side, given the market uncertainties and I think also, in view of the blackout period in April. So we've been doing nicely and well with good reception in the market. Pfandbrief volume was up to EUR 1.5 billion new issuances and senior unsecured -- fully preferred had EUR 1.2 billion. As I said EUR 500 million benchmark, EUR 250 million taps and the rest is private placements. Again, what I mentioned already, the funding spreads have widened over the last year that is visible, but the average issuance spread which we give out is still below what we see on maturities. So it's roughly 20 bps for the first quarter, 20 bps up on Pfandbrief, 30 bps up on preferred. But meanwhile, that's also noteworthy and as you can see on Page 21 of the slide deck, things have become, again, a bit friendlier, a bit quieter as spreads in the market, as a whole -- on the whole have come down. And so we also observed the significant tightening of our unsecured spread levels over the last weeks for pbb senior preferred prices down to approximately 55 bps, which, by the way, is above the average at which we issued, on average, last year. The interesting thing is that the elasticity on Pfandbrief pricings is probably less pronounced, although much reduced as well with the new issuance premium back to almost 0. In our view, we would expect less movement all in all because ECB has basically stopped activity in this asset class and that was the reason for the very benign pricings, which we did see in the first quarter of 2018. So -- that's one reason. The other reason is given the low leverage and given the fact that ECB does not support this asset class anymore, investors tend to trend towards longer maturities, longer durations in order to realize some pickup, whereas we are searching for more medium- to long-term exposure. On capital, which is Page 23, capitalization stayed strong and should stay strong -- will stay strong. CET1 ratio stands at 18.8% as mentioned, after 18.5% last year due to slight decline in risk-weighted assets in the first quarter. Now you would rightly expect that with the net growth in Real Estate Finance portfolio, in nominal values, also risk-weighted assets will go up, but we had a number of technical and valuation-driven effects, which did counterbalance this development. That was especially from delayed booking of collaterals, new property valuations, but most importantly, due to positive rating changes. If you look back or if you listen back to what I just said about lower LTVs, country mix, property mix, I think it explains itself that we should see some reflection of that also in risk base. Capital position, as such, remains by and large unchanged, and thereby Tier 1 ratio is up to 20.9%, own funds to 25.4% and leverage ratio to almost unchanged, 5.1%. In this context and to preempt questions, otherwise, which otherwise will undoubtedly come, let me remind you that we still factor in a regulatory cushion of EUR 4.5 billion to EUR 5 billion additional risk-weighted assets due to model changes, targeted review of internal models and for Basel IV effects and cyclical internal views. That is unchanged again from last year in results and CET1 ratio of approximately 13.5% to 14.5%. So strong capitalization remains if you want to put it this way, a capital factor, an important factor in our business strategy. We did apprise you -- and that brings me to Page 25. We did apprise you with the key elements of our Focus & Invest program for 2019 last time and would like to do some reporting on progress so far. The Public Investment Finance reorganization is more or less completed, we take out 2/3 of the head count on that segment and more than 50% of the head -- the cost. Again, I mentioned that to be realized in second half. The rest accounts for taking care -- the rest which remains with the bank is for taking care of the portfolio and for a carefully targeted new business to feed into the whole proposition of that portfolio. The other point is refocusing overhead resources that is also almost finished. With this measure, we are -- as I did describe last time, we are centralizing several [ and ] remaining head office functions from our locations in Eschborn and abroad to our head office in Unterschleissheim and soon to be Garching. And 90% of all personnel measures have been started and 2/3 is completed. So I think what we show is as we did start these initiatives in October, November last year that we have a fast and very complete turnaround of that part of the initiative. The savings which we receive from the Focus measures and the Focus initiatives will be reinvested into our future, which brings me to the second part of the overall initiative and that's the investment part. U.S. business gathers further momentum. We opened our new representative office in New York in summer of last year, you were informed about that. We started with a small team and we are still in the process of adding people, but we are approaching the targeted size. And in late summer, we will move to our permanent offices in Madison Avenue near Grand Central Station. So a very central location. And in case you would like to look up our offices there, be welcome and just give us a ring beforehand. As new business share in 2018 was 13%, we did say we're targeting a bit more for this year, now with quarter 1 and 10% share in business, we are seasonally -- I would say seasonally a little bit slow, but we're optimistic that the business which we have in the pipeline realizes according to plan, which by the way, should be supported by our careful expansion into primary business and syndication business, also in Chicago, Seattle, Los Angeles and San Francisco. And first syndication deals have been done in both cities in Los Angeles and San Francisco. The other big initiative is digitalization. With this initiative, we aim to push forward digitalization in pbb. We see chances of improvement in services and products and technologies and not to become more digital is not an option for us. We see significant changes ahead in all commercial real estate business, the major changes will be with regard to client interface and processes in general and processes in credit, in particular. And the third element is the importance of platform solutions is expected to increase in the long run and also in our business in our commercial real estate financing business. So we are targeting these -- we're targeting 3 directions on exactly these 3 headlines: improving client interface, first point; second point, increase efficiency of our internal processes; and third, evaluate new income sources through platform and placement business.We are currently in the process of establishing new client portal for our real estate finance clients. Remember, I think I mentioned mid of last year, we have already a small solution for that for development clients, development and [ all pbb Deutsche ] clients. But would like to expand that into larger scale for all real estate finance clients to improve on customer satisfaction and efficiency.The focus very clearly is on client relationship. It is on data and document exchange. It is on generating benefits on both sides for our clients as well as for us for the bank. It's about introducing API, so application programming interface technologies. It's about introducing artificial intelligence. It's about new product -- project and programming process through agile developments.We would be providing account balances information on covenant testing, information on business case analysis. We would absorb or we would transfer client data and tenant data both sides and so on, digital data room, document management. Those are the headlines which fall under this kind of exchange and interchange between us and the client.Having said that, the next logical step is to take that standardization, that automation and digitalization of information and take it into the bank, incorporate that into the bank's core processes. That's the second biggest block.And the third big block is platform, and CAPVERIANT is already known to you. It's our answer to the platform question. It's an answer which is targeting or aiming at municipalities and investors -- institutional investors, but it is, at the same time, also a way to depict how potentially we could move on with more standardized business and commercial real estate in future.The platform on the actual -- the actual traffic on this platform is increasing. Tender volumes have increased over the last 2, 3 months significantly, and we did launch CAPVERIANT in France in April, on point and on time.In addition, that is important. You just don't become digital "by command." You have to introduce new ways of managing the business, new ways of setting up structures and projects, and thus, we have established an organizational framework for, for accomplishing all these things, which are just depicted. That's about a new business area called digitalization, which manages the process across the entire bank. That's about digitalization teams in the respective segments of the bank and so on.So with that let me come to my conclusions. pbb is well on track. We had a good start into 2019 despite all odds and headwinds. We are making good progress in our Focus & Invest program. And I think we're well positioned for the future in terms of market challenges, which we expect through the risk profile, which we maintain and adhere to. We're positioned toward regulatory changes through the capital buffers, which we maintain and well positioned towards digital transformation and reinvestments and the structural changes we undergo within the bank.What do we expect for 2019 going forward? Well, nothing new on that side. Market would stay highly competitive, supported by unchanged low interest rate environment and keeping the margin pressure on. We will see through 2019 further support from reduced funding cost, but at a diminished rate throughout 2019. With all that in mind, let me reconfirm our full year guidance for 2019.With that, I would conclude my presentation. Thank you very much for listening in, and I'm happy to take questions if and when you have some. Thank you.

[Walter Allwicher, Head of Communications]

Okay. So we'll jump right into the Q&A section.[Operator Instructions] The first question comes from Johannes Thormann from HSBC.

[Johannes Thormann, Global Head of Exchanges and Analyst]

Johannes from HSBC. Three questions if I may. First of all, could you comment a bit on the full-time employee trend outlook? Do you expect the numbers to decline now or increase? Just a bit more clarity on that. Secondly, you mentioned the 2 U.K. shopping centers that there was no negative news or additional needs for provisioning, but we heard stories before that there could be some releases of the provisions made last year. So what's in the pipeline for that? And last but not least on your new business mix and then the setup was heavily skewed toward France and then the margins was -- it was more impacted by France or more impacted by Germany because the decline in LTV was just minor versus the decline of margin by [ 1/6 ] approximately. And last but not least, in terms of the new business and the syndication in the U.S. tends to pick up in Q2 and Q3. Should we also expect this for Pfandbriefbank?

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

Yes. I answer that in reverse order. New business mix skewed towards France, but the key point is, and I think I mentioned that already in some of the earlier presentations, we see sort of universal trend in the key and core countries in Europe towards sort of same line, same level margin throughout the countries. So any addition to the portfolio, any addition to the portfolio share on the French side basically reflects that in terms of margin development. So there is a convergent of margins, convergent of spreads. And as we have focused in first quarter on those countries where we see anyway relatively low margins in total, that's been a decisive driver of that development.On syndications in the U.S., yes, we would go along with that. As I said, the portfolio pipeline looks good. It looks good both in terms of pricing and in terms of volume, and we would expect some more business to materialize from that end at hopefully somewhat higher margins.Now U.K. shopping centers, there are 2 things. I might have been a little bit too cautious in terms of wording. I think the developments are positive. Whether we answer that with releases of LLPs, we will see. Let me put it this way. Although we see positive developments on these 2 U.K. loans, the overall situation in the U.K. is not to that extent favorable that we say we would gladly release all the results, which we have. So being cautious, we probably will try to keep onto that as long as we can, as long as we can convince the auditors.And full time, FTE outlook, no major moves on that side for the remainder of 2019 because what I said before is whatever we release in terms of FTE -- restructure in terms FTE is going to be reinvested into the growth initiatives which we have.

[Walter Allwicher, Head of Communications]

There are 2 further questions registered and first Benjamin Goy from Deutsche Bank and then Nicholas Herman from Citi. Benjamin, please go ahead.

[Benjamin Goy, Research Analyst]

Two questions, please. First, on your net interest income guide that was confirmed as well. Just wondering, you're up 8% year-on-year. You mentioned your new funding spreads are still better than the maturing issuance. So what is here the main delta? Or where do you still see risk in the rest of the year? And then secondly, development loans. You mentioned, it was hardly anything in Q1 and also the share of development loans and your real estate finance book is more or less stable for the last year after a significant expansion since IPO. So wondering is that a level you feel comfortable with. Or could we see further growth here going forward?

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

On development loans, strategically, structurally, business-wise no changes. It just happened to be a very low show up in the first quarter, so structurally no changes to be expected. We focus and we concentrate on German business there. We have very little to none outside Germany, and we will continue to keep it this way.On NII guidance, I think the cue and the hint, which you can take is if you look at last quarter of 2018 with the EUR 116 million there and the EUR 116 million first quarter 2019, you see that a mixture of volume growth. Pressure on asset margins or real state finance and some relief on the liability side could use as a sidewards movement. Now the question is what will be determining factor as we go forward, and as I mentioned, the margin pressure, although not to the extent which we have seen on gross margins in first quarter 2019, but to some extent will prevail, and although we have some relief on the liability side, we did guide for and we stick to our guidance there. We will see some moderate decline in average margin. And that's the key delta and the key driver, which we also expect for the remainder of the year with -- in addition with the prospect that we tend to be cautious on further volume growth. So we see how we come on that side. So for the time being, no change in guidance on NII.

[Benjamin Goy, Research Analyst]

Maybe one quick follow-on on the development loans. So there is no restriction from S&P or anything, so it's entirely up to your risk appetite and opportunities in the market. Is that fair to say?

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

That's sort of fair to say. We stay within the risk policies, which we have set out ourselves, which of course look into the overall risk profile and also look into what rating agency consider to be a [ real ] level of business and development loans and [ bulk trigger ] loans.

[Walter Allwicher, Head of Communications]

Next question comes from Nicholas Herman.

[Nicholas Herman, Assistant Vice President and Analyst]

Just 3 questions, please. Firstly, just curious if you expect spreads to widen over the course of this year, why not prefund more growth now and raise more debt financing now. Secondly, just curious in a very hypothetical and unlikely scenario that spreads remain exactly as they are over the rest of the year, how long will it take for the benefit -- the monthly -- the funding tailwind to fade. Will that be next 2020? Or I'd be interested to hear that. And then finally, given your LTVs continue to fall, why is it unreasonable to assume that LGD changes continue to keep coming through?

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

Okay. Now, I think I didn't say that we expect spreads to increase. What we see is the present market level, which was quite volatile last quarter 2018 and beginning of 2019, and that's sort of the funding levels, which we adjusted to ourselves. Now we did not forecast further increases beyond that for the remainder of the year.On the contrary, we actually do observe presently that the funding spreads for senior preferred have come down, and we would probably, if we go off on another benchmark in the second quarter for instance -- that's not a market announcement. It's just a hypothetical idea. If we would go out with a new senior unsecured -- sorry -- preferred senior unsecured, we would expect, given the levels which we see today, to come out at lower spreads than we did realize in the first weeks of 2019.So that leads me to your second point. If we were to assume that spreads remain what they are, I think what you are asking for is when is it that new issuance spreads and the back book spreads are going to meet.

[Nicholas Herman, Assistant Vice President and Analyst]

Yes.

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

That's a very good question. We -- which I have to look up. The way we forecast that for 2019, we would still see positive benefit from that situation for that constellation throughout 2019. And beyond -- I would be answering questions when we come to 2020. So still a positive drift on that side, meaning that what rolls off, comes off at higher spreads than what we put back to the book.Now the last point, LTV still falling due to LGDs. Now there are 2 things. One is -- and that's the overall situation of models. Model reflect what you have realized just now, so the forward-looking aspect of that is restricted to put it this way. We've seen on -- through the back mirror, a lot of good business on our books with ratings and with LGDs, which are still within a positive trend. So nobody should be surprised that this reflects in a positive development on LGDs and that it also reflects a positive development in risk weighted assets.That may change very quickly for 2 effects: 1 is if we come to a higher surcharges on the risk weighted asset side due to regulatory changes or model changes, which we partially have seen and communicated in the past; and the other 1 is if cycle turns. And then the question is how good is the calibration of the LGDs and how susceptible are LGDs to market changes.

[Nicholas Herman, Assistant Vice President and Analyst]

Sure.

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

And that's the somewhat philosophical aspect of running these models, is how pro-cyclical or after cyclical they actually run, how much they're a good precursor and predictor of what we see happening in the markets. So that's my answer to that.

[Nicholas Herman, Assistant Vice President and Analyst]

I just have quick -- 2 quick follow-ups, please. So on the funding one, again, very hypothetical scenario. It sounds like that benefit would come through in 2019 and somewhat beyond, but unclear as of now or you won't comment as of now. But it sounds like it would continue to come through for a bit longer. And on the capital side again, assuming no change, again, this is hypothetical, but you would therefore see some benefit. But of course, that would, as you said, be offset by any changes to the environment and additional surcharges.

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

Yes and changes on the [ side of the ] book. Yes.

[Nicholas Herman, Assistant Vice President and Analyst]

Yes, yes, exactly. Exactly. No, no, that's fine. It's just helpful to understand like the underlying trend as well.

[Walter Allwicher, Head of Communications]

There are 2 further questions registered: Tobias Lukesch from Kepler and Philipp Häßler from Pareto. Tobias, please go ahead.

[Tobias Lukesch, Equity Research Analyst]

Two questions from my side. First on geographies and product. Maybe you can give us a hint where you may see most struggles with regards to either keeping up on latest quality performance or risk/rewards or keeping up with your internal risk policy with regards to development of writing new business in these areas would be interesting. And attached to that, there are other players out who are much more active in the hotels product segment. Maybe you can remind us why this is a segment that we hardly see in your portfolio. And secondly, I may not have grabbed that, the FTE impact that you guided for the PIF segment. Maybe you can remind me what the impact is you kind of already see for Q2 would look like. That's it.

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

Now FTE impact on PIF segment, we did guide here for the second half of 2019. On gross figures, you will see not much because whatever the restructuring part is will be reinvested into the rest of the business, so you should look at fairly even FTE figure around 750, 760. And therefore, what you will see is a shift of cost away from segment Public Investment Finance into other segments, notably real estate finance, which is shifting the emphasis of the business and shifting the cost accordingly.On hotels, I think the answer is very [ quick ] and easy. We do focus on business hotels in prime locations. We do give ourselves fairly strict restrictions on how much of these hotels we want to do in one place. So even if there is a lot of building activity, I mean, remind you of what happens, for instance, in some quarters in Frankfurt just now. We do have limits on that, and therefore, our share in that business is where it is. There's a much broader definition of hotel and leisure, and I suppose others go for that broader definition. We have a fairly narrow one. The -- and that of course is due to experience, due to risk aversion on that type of business and also, to be honest, due to the fact that we have limited experience with that segment outside the business hotels.Now geographies and products, that's the more tricky question where the biggest challenge is. The easy answer is if we just return to the business mix, which we have seen in the quarters before, and which is sort of the established plan for the bank and the established structure of the bank and which reflects also the capacities, which we have in CEE business, in the rest of Europe business and so on, we probably would go with the same risk profile and better margins ahead. So whatever comes will be at cost of Germany and France business. The business share there should be somewhat lower and more focused on the Benelux, Spain, Scandinavia, CEE and so on. And that's not sort of going away from the present setup. It is returning to what the intended structure is and the intended structure which we pursue.And the same goes to some extent for the business mix in terms of products or in terms of assets, 55% office and 22% residential and only 4% retail and very little on logistics and things like that, something which I do not expect as the targeted business mix for 2019. We will see some adjustment there, but not with a big push, but with some business, which originates through the pipeline quite naturally.So what else remains to be said about that? And that's important even for the business mix, which we see here today, but even though more so for the one, which we would like to revert to is that no business is done, which is not EP profitable. So economic profit on the transaction needs to be sure, otherwise, the transaction's not to be done.The other side condition certainly is what is the amount of contribution apart and beside from that and how much business we want to book with low margins long term as opposed to being more selective on volumes. There, for the next 2 to 3 quarters, I think we will do a very cautious steering between margin here and volume there. As we always did in risk terms, it's always the quality, which comes before the quantity. That's not saying we did not book qualitative business in the first quarter. It is in risk, in terms of risk profile and in terms of economic growth profit, actually, very good business.

[Walter Allwicher, Head of Communications]

Philipp, please go ahead now.

[Philipp Häßler, Analyst]

Philipp Häßler from Pareto Securities. Only one question, a clarification question. We have seen growth of the real estate portfolio by close to 4% in Q1. For the full year, you stick to the guidance of moderate increase, but I think you were also mentioning for the next quarters you would expect a moderate increase. Or does it more mean for the full year, you expect a moderate increase so a more or less stable development from now going onward?

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

Well, the guidance is for full year, and it's a moderate increase. So that's as much as I can say. We have some, say, positive drift and positive development from the first quarter that helps us on the overall figure. Moderate is not 0, but moderate is also not 7% or 8%.

[Philipp Häßler, Analyst]

So it's about 5%.

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

Well, that's not what I said, and it's very much dependent. There's this big unknown factor -- there are 2 big unknown factors, and that's why I tend to be a little bit reticent on that. One is we see, as we go along, that some viewers are being pushed down the line in terms of timing, so we don't know how much out of that would affect new -- writing new business.On one hand, the other one is the point of prepayments. We did see remarkably little prepayments in the first quarter. Now experience shows that during the course of the year can change also significantly, and that's something -- I mean we've been trying for the last 2 years to install a good forecasting process for prepayments, and we have been so successful on that, yes?So therefore, moderate increase means moderate increase for the full year.

[Walter Allwicher, Head of Communications]

We have no further questions registered, and so I'm happy to say we'll call it a day and [ with this ] we have come to the close of this call. I'd like to take the opportunity to thank you for your interest in pbb and also for your coverage. We look forward to speaking to you soon. Take care. Bye.

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

Thank you. Buh-bye.