Deutsche Pfandbriefbank AG
XETRA:PBB
Deutsche Pfandbriefbank AG
Deutsche Pfandbriefbank AG engages in the provision of commercial banking services. The company is headquartered in Garching Bei Muenchen, Bayern and currently employs 784 full-time employees. The company went IPO on 2015-07-16. The firm is engaged in three core business areas: Public Sector Finance, Real Estate Finance and Debt Instruments. Public Sector Finance includes the financing of public sector investments in the fields of infrastructure, municipal and residential construction, utilities and healthcare. In addition, it provides investment lending and debt management. Real Estate Finance includes real estate investment funding and financing instruments, such as financing investment projects, portfolio financing, standby facilities and derivatives. Debt Instruments includes fixed income bonds involving issuing mortgage and public sector debentures. The firm is active in Europe, notably in France, the United Kingdom, Benelux countries, Nordic countries, Switzerland, Spain, Hungary, and the Czech Republic. The firm is a part of the HRE Group, which is wholly owned by the German government.
Earnings Calls
In the first nine months of 2024, Deutsche Pfandbriefbank reported a 2.4% increase in operating profit to EUR 425 million, driven by net interest income growth to EUR 359 million. Their pretax profit was stable at EUR 87 million. Notably, risk provisions dropped by 34% to EUR 37 million in Q3. The bank aims for a total revenue of approximately EUR 5.5 billion for the year, slightly below previous targets. The CET1 ratio stands strong at 17.3%, reflecting robust capital management amidst a volatile market. The bank will prioritize margin over volume, navigating through geopolitical uncertainties while eying new business opportunities, particularly in the hotel sector.
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Good morning, ladies and gentlemen, and welcome to the Deutsche Pfandbriefbank AG conference call regarding its 9 months results 2024. [Operator Instructions]
Let me now turn the floor over to Kay Wolf, CEO of pbb Deutsche Pfandbriefbank.
Thank you very much, ladies and gentlemen. A warm welcome to our analyst and investor call. I'm very much looking forward to taking you through the facts, figures and data for the third quarter and the first 9 months, of course, together with our CFO, Marcus Schulte.
As usual, for the third quarter, figures are based on IFRS for the group and have neither been audited nor reviewed. After the presentation, we have reserved sufficient time for your questions.
The third quarter was a solid quarter for us. In the first 9 months of the year, we were able to increase our operating results to EUR 425 million, up 2.4% compared to the same period last year. This is largely driven by an increase in net interest income to EUR 359 million. Here we continue to benefit from our focus on profitable new business with notable higher margins.
Pretax profit reached EUR 87 million, after EUR 91 million in the same 9-month period of the previous year. Our pre-provision profit, however, increased 16% to EUR 227 million. This allowed us to well cover the expected elevated risk provisioning of EUR 140 million for the first 9 months. Looking at Q3 risk provisioning in isolation though, it's down 34% compared to Q2 2024. With this result, we currently remain on track to fulfill our financial guidance for this year.
Looking at the CRE markets. we see clear signs that we have reached the bottom of the current cycle. We are observing that investment volume start to rise, although from and at a low level. Property yields appear to have reached their turning point. We expect this to continue in the fourth quarter. However, we continue to have a realistic view on the CRE market. We do not yet see a sustainable turnaround.
When looking at the wider macroeconomic and geopolitical environment, we see heightened uncertainty. Market volatility has clearly increased during the past weeks. While the results of the U.S. election were no real surprise, the speed of the recent events in Germany came unexpected. We appreciate the fact that political leaders have decided on a way forward since yesterday evening because we cannot afford this kind of uncertainty here in Germany.
This is even more important as, during the last couple of weeks, we observed a further increase in geopolitical uncertainty. At the center of this is the U.S. future stance on the war in Ukraine, its relationship with China, the NATO and the conflict in the Middle East. At this point, we hope and ask for prudence from all political leaders.
When looking at the economic agenda in the United States, it can be expected that significant tariffs on imports from all trading partners will be introduced. This would, in particular, affect export-orientated countries such as Germany. And other plans such as extensive tax cuts and higher government spending would further boost economic growth in the United States.
On the other hand, the plans to subsidize conventional energy sources could lead to lower energy price and thus provide also a positive impetus for growth. There may, therefore, also be tailwinds for the U.S. commercial real estate market. However, there is no clear picture on all of that yet. We expect that these partly opposing trends will keep volatility high in the foreseeable future. We are keeping a close eye on all of the developments mentioned here today and their implication on our business.
Our rational and realistic assessment is that this uncertainty and volatile environment will remain with us for the next quarters. Irrespective of this, we believe that we are well positioned, especially with our Strategy 2027, to make pbb a more resilient and significantly more profitable in the coming years.
As a reminder, we have set 4 strategic directions. First, the strengthening of our core business: commercial real estate financing. We plan to achieve this by diversifying our portfolio into future-proof asset classes and focusing on high-growth business, including newer asset classes such as data centers and service living. In future, this will take place in the Real Estate Finance Solutions division.
Second, the development of a significant commission and fee income business which from now on will be the new Real Estate Investment Solutions division. Third, the value-preserving reduction of our noncore portfolio. And fourth, increasing efficiency and adapting the current operating platform, also making further enhanced use of technology and artificial intelligence.
We plan to more than offset the investment costs for the development in our new business areas by significantly and strictly implementing our ongoing cost measures and initiating additional cost savings. Our cost-income ratio is expected to fall to below 45% by the end of 2027.
In the Real Estate Finance Solutions, we expect our portfolio to remain largely stable. However, the composition is expected to change significantly in order to better reflect structural market developments with high potential. These include macro trends such as growth of e-commerce and cloud computing, the increasing demand for living space from students and an aging society in the industrialized countries.
We will, therefore, address high-growth asset classes such as data centers, service living and senior living. In addition, new business in logistics, hotel and retail sector will increase, while the office and residential sector will be given a lower rate.
With this portfolio optimization, the business segment's contribution to earnings should continue to rise despite a largely stable volume, especially as loan loss provisions are expected to normalize over the next few years.
The new Real Estate Investment Solutions division combines our off-balance sheet commission and fee income business. This segment will have 2 pillars: first, pbb Invest, our asset management. Organically and inorganically, we plan to grow assets under management to EUR 4 billion to EUR 6 billion in total by the end of 2027.
Second, with originate and cooperate, we want to take an active role in the structural changes of the European commercial real estate finance market. In Europe, we see a fast-growing market of real estate finance provided by institutional investors, a development that follows the U.S. market where around half of the financing volume is already provided by this investor base.
In partnerships, we want to offer this rapidly growing investor base, in particular, our sourcing and structuring expertise, but also products such as due diligence and loan servicing.
We will become a service provider, expanding our share of the changing value chain for real estate financing, and doing so with significantly less capital employed for this business. We were able to announce our first success in this area a few weeks ago. We want to join forces with Starwood Capital, a leading global private investment company with a focus on property investments as part of a partnership to participate in joint lending and origination.
This is an important step for us because it shows that the interest in corporations in a structurally changing European commercial real estate market is high, and pbb is a recognized and sought after partner for this. We have stepped up our efforts, and we will continue to make progress here as the Real Estate Investment Solutions division is expected to generate around 10% of the bank's total income by 2027.
Talking about progress made in developing our business strategy, we have also progressed in our transition to become an F-IRBA institution under the new Basel rules that apply starting in January 2025. We have now received final approval to change our risk models and will apply the F-IRB approach as the modeling and risk standard for the majority of our real estate finance portfolio from 2025 onwards.
This will conclude our transition into the new Basel regime and provides a reliable, stable foundation on risk model for capital requirements in our core business. At the end of September, our Basel IV pro forma CET1 ratio stood at a strong 17.3%.
And with that, I would like to hand over to our CFO, Marcus Schulte, for a more detailed look at our 9 months result.
Thanks, Kay. Good morning also from my side. Let's start, as usual, with an overview of the business-related metrics on Page 6.
As we have emphasized now several times, we put a stronger focus on profitability in our core business. With this approach, we were able to significantly improve the average gross interest margin by around 40 basis points to around 240 basis points compared to the first 9 months last year. On the same note, our revenue business volume, including extensions, is at EUR 2.5 billion in the first 9 months, down from previous year.
Against this background, we expect revenue business volume of around EUR 5.5 billion for the full year, which is slightly below our initial guidance of EUR 6 billion to EUR 7 billion.
The volume of our existing REF portfolio declined to EUR 29.1 billion in the first 9 months. This in particular reflects the EUR 900 million portfolio transaction as part of our active balance sheet management in May, but also our more selective and profitability-driven focus in line with our Strategy 2027. That said, we expect our REF portfolio to increase again to slightly below EUR 30 billion by the end of the year.
We are making further good progress in optimizing our noncore portfolio through accelerated but value-preserving sell-down. Since beginning of the year, we reduced the portfolio by EUR 1.6 billion to EUR 10.8 billion, EUR 400 million of that in Q3. Of the total EUR 1.6 billion reduction, EUR 1 billion is attributable to active asset sales. At the same time, we repurchased some of the corresponding public sector fund briefer on the liability side of the balance sheet.
As previously mentioned, we had stronger-than-expected inflow in retail deposits in the first half of this year, actually exceeding our needs. With cost-efficient external rates, we, therefore, managed the pbb direct volume down by EUR 300 million to EUR 7.8 billion in Q3, and we are still targeting a volume of around EUR 7.5 billion at year-end.
Moving to the P&L overview on Page 7. Operating income rose by 2% from EUR 450 million in the first 9 months last year to EUR 425 million during the first 9 months of this year. This was mainly due to the more than 3% increase in net interest and commission income to EUR 362 million. I will come back to this in more detail.
With strict cost discipline, we were able to keep our general and administrative expenses stable year-over-year at EUR 179 million, despite the overall inflationary pressure and although expenses in the third quarter rose to EUR 64 million, as expected, due to IT and strategic investments. In this context, we expect a further cost uplift in the fourth quarter. Accordingly, we expect the cost interim ratio to rise temporarily from the current 46% to 57% by year-end, as already communicated before.
So based on solid operating income and cost discipline in the first 9 months, and considering lower bank levies, profit before risk provisioning was up by EUR 32 million or 16% year-over-year. However, as expected, at minus EUR 140 million, risk provisions remained at an elevated level, up EUR 36 million compared to the first 9 months of last year.
This is because the first half of 2023 had lower loan loss provision levels than the first half of this year. In the isolated third quarter of this year, risk provisions came significantly down by 34% quarter-on-quarter to EUR 37 million, benefiting from releases in stages 1 and 2 due to improved macroeconomic parameters and, here, predominantly interest rates. All in all, risk provisions remain dominated by U.S. office loans and German development loans.
All this led to a solid pretax profit of EUR 40 million in the third quarter, the strongest quarter since Q2 last year. At EUR 87 million, pretax profit for the first 9 months is therefore on prior-year level. As of now, we are, therefore, on track to achieve our full year forecast for 2024 even though the macro and market environment remains challenging. As already mentioned by Kay, namely the impact from the development of interest rates, especially in the U.S., needs to be monitored.
This brings me to Slide 8, the first deep dive. As mentioned, the operating income increased by EUR 10 million or 2% year-over-year to EUR 425 million, essentially driven by more than 3% increase of net interest and commission income to EUR 362 million. This was driven by a slightly i.e., EUR 400 million higher average REF portfolio and, at the same time, an increase of the average portfolio margin. At the same time, the noncore portfolio decreased and funding costs were up.
Realization income and other operating income remained largely stable compared to the previous year. At EUR 57 million, the realization income had a positive impact here. It compared to EUR 45 million in the same period of the previous year. This is due to the aforementioned sales from the REF and noncore portfolio as well as the buyback of liabilities.
If looking at the quarterly developments, operating income was also up, by EUR 15 million. Here, the EUR 10 million decrease in NII and NCI in Q3 2024 mainly reflects the portfolio reduction, especially the portfolio transaction in Q2, and higher funding costs. Equally higher realization income was driven by EUR 13 million from asset sales and EUR 8 million from liability buybacks. EUR 12 million other income in Q3, especially includes positive impacts from sharply decreased interest rates, including one-offs over tax reimbursement.
Let me conclude this page by saying that also on a quarterly basis, profit before risk provisioning was up by EUR 8 million.
Turning to risk provisions. As expected, our risk costs remained at an elevated level in the first 9 months, with net income from risk provisioning of minus EUR 140 million, but significantly down to minus EUR 37 million in the third quarter, minus 34% from the minus EUR 56 million in the second quarter.
The decline in risk provisions in the third quarter compared to the second quarter was supported by net releases of EUR 22 million in stages 1 and 2. This is due to improved macroeconomic parameters, in particular, interest rate levels in U.S. and Europe. This also includes the complete release of the management overlay which was formed for risk in the U.S. real estate markets that have in the meantime transpired into Stage 3.
Additions to Stage 3 in the third quarter were at EUR 59 million and continue to be primarily attributable to office properties in the U.S. and project developments in Germany, plus some additions for legacy U.K. shopping centers.
Slide 10 then looks at the stock of loan loss provisions as usual. Year-over-year, the total loan loss allowance decreased from -- slightly from EUR 589 million to EUR 568 million as releases in stages 1 and 2 overcompensated for additions in Stage 3. The net decrease in Stages 1 and 2 was mainly driven by the full release and consumption of the management overlay of EUR 31 million as well as model-based releases of EUR 21 million due to improved macroeconomic parameters. The net increase in Stage 3 was mostly driven by additions for U.S. office and German development loans.
Looking at the isolated third quarter, we saw a net increase of EUR 29 million in loss allowances. While Stage 1 and 2 loss allowances further decreased by EUR 29 million quarter-on-quarter due to improved macroeconomic parameters and the release of the remaining U.S. management overlay, Stage 3 loss allowances increased by EUR 58 million from the previously mentioned areas. Net additions were EUR 32 million for U.S. office, EUR 8 million for German developments and EUR 17 million in the stock of loss allowances for U.K.
This brings me to operating expenses. All in all we kept strict cost discipline. Year-over-year we managed to keep operating expenses stable, successfully mitigating the inflationary cost pressures, as mentioned. However, in the third quarter, we saw, as communicated and expected, a cost uplift of EUR 7 million quarter-on-quarter to EUR 69 million, driven by a normalization of personnel costs after provision releases in the second quarter and an increase of nonpersonnel costs from IT and strategic investments.
As envisaged, we expect a further uplift in the fourth quarter. This will particularly be driven by the change of our IT provider and insourcing of IT with parallel technical setup in the current phase before the previous provider is replaced by the end of the year. We are now well advanced in this process. Furthermore, we continue to drive digitalization and strategic projects forward. In total, we expect cost-income ratio to temporarily rise from the current 46% to 50% by the end of the year, as already mentioned.
Let us now turn to the portfolio. As you can see, the performing REF portfolio on Page 13 has decreased by EUR 3.3 billion since the beginning of the year to EUR 28.2 billion at the end of September. The reduction in the first 9 months is mainly due driven -- mainly due to loan repayments and the portfolio transaction of EUR 900 million in the second quarter. Regionally, we mainly saw further reductions of the U.S. as well as the office and the development portfolios. This is in line with Strategy 2027.
As we are in the late commercial real estate cycle with markets bottoming out, it is not a surprise that 12 months rolling evaluation dynamics slightly improved for the total REFs, Germany and office portfolio, but remains mixed for the office portfolios in the U.S. The average LTV again -- increased slightly again from 55% to 56% in Q3. So overall, portfolio quality remains robust.
The exposure at risk, i.e., the layered LTV down to 70%, increased in the third quarter. However, there has been no significant changes in the upper LTV layers above 80%, but rather in those at or below 70% where another 30% devaluation this late in the cycle appears an onerous sensitivity to look at.
Let us now turn to the nonperforming REF portfolio on Page 14. Active NPL management enabled us to further reduce the number of NPLs in the third quarter whilst registering a small increase in the volume to EUR 1.66 billion, 2 additions with a volume of EUR 199 million, 3 reductions with a volume reduction of EUR 130 million.
The new additions related to a U.S. office property financing and a German development loan in the land phase, the latter with a relatively high notional volume of EUR 108 million but with no risk provisioning needs. The reductions relate to 1 U.S. office and 1 U.K. office loan as well as 1 development financing in Germany.
Considering increased Stage 3 loan loss provisions, the NPL coverage ratio increased from 24% to around 27% in Q3.
Let's take a look at the U.S. performing portfolio. Our focus here continues to be on risk reduction. In the third quarter, we saw further reduction of the portfolio by EUR 200 million. Since the beginning of the year, the U.S. performing portfolio has thus been reduced by EUR 1.2 billion to EUR 3.3 billion, which is primarily due to the portfolio transactions and repayments.
Supported by our active NPL management, the U.S. NPL portfolio came slightly down in the third quarter to EUR 730 million. Here, 1 new office addition from the East Coast was met by 1 successfully restructured office case in Chicago. We also observed a partial repayment of EUR 23 million in L.A. which is included in the column labeled FX ARD effects.
Considering increased Stage 3 loan loss provisions, the U.S. NPL coverage ratio has also increased to 25%, up from 19% for Q2.
This brings me to the development portfolio on Page 17. We significantly reduced our project development portfolio in the first 9 months of the year by EUR 800 million. At the end of September, the volume totaled around EUR 2.4 billion. As already mentioned, we recorded a new addition to the NPL development portfolio in the third quarter. This is a development in the so-called land phase for which no risk provisioning has to be recognized. In turn, 1 nonperforming development loan in the land phase was repaid at book value.
In terms of project progress, over 2/3 of the projects are in the so-called land phase or in the completion phase. The net risk in these 2 phases is naturally lower. The remaining share of around 28% is attributable to projects in the construction phase, which still accounts for the majority of risk provisioning and remains the focus of risk management. It is therefore also positive to mention that 1 NPL in the construction phase has migrated to the finishing phase.
Just briefly looking at the German portfolio. We remain well diversified by regions and property types. LTVs continued to be moderate at 55%. The exposure at risk increased on the owner's 30% sensitivity interval has increased together with Stage 1 and 2 loan loss provisions, so that the respective coverage ratio has actually increased to 32% in Q3. We continue to have no NPLs from German investment loans.
Actually, I can keep it short on the funding side on Page 20. Our liquidity position remained strong with just under EUR 7 billion. Liquidity ratio is still well above regulatory requirements. Given our active funding in '24, we have no more need for wholesale funding in 2024, neither for fund brief nor for unsecured. That said, we will, of course, remain a regular issuer of fund brief and benchmark format as well as private placements in different currencies when opportunities arise.
For 2025, we also plan for a Green Senior Preferred benchmark. As already explained at the beginning, I'm on the next page with the deposits, after strong inflow in the first half of the year, retail deposits still exceed our needs. Therefore, we are focusing on optimization with an expected volume of around EUR 7.5 billion at year-end, which is unchanged to what we communicated at H1. Over 90% of our deposits are term deposits and sticky. So in the interest of NII, we can afford to be price conscious.
That brings me to funding costs on Slide 22. Due to the prefinancing at the beginning of the year and our strong liquidity position, we were able to cope well with the volatility phase in February and March and avoided issuing during this period. Meanwhile, fund brief spreads have tightened to pre-volatility levels, having enabled us to accelerate our funding activities in Q3 at manageable costs. After EUR 1.2 billion in the first half of the year, we issued another EUR 800 million in Q3 at affordable spreads.
As mentioned, we are optimizing our retail deposits to our needs with a view on NII. After having cut interest rates twice in May by 100 basis points, we have now again lowered interest rates by 45 basis points in November, which brings us back to favorable cost levels of around mid-swaps for our deposit funding.
As mentioned by Kay, we remain solidly positioned on the capital side. I'm on Slide 23. You see the visualization of what Kay had explained. Even under the transitional calibration of risk weights to standardized parameters, we had a CET1 ratio of 14.5% at the end of September. This corresponds to an increase of 50 basis points compared to the first half of 2024. The pro forma Basel IV F-IRBA CET1 ratio increased to 17.3%. As mentioned, we have since received the expected approval for the actual application of Basel IV F-IRBA from the first of January 2025 onwards.
To briefly sum it up, markets remain challenging and leave some uncertainties, especially with regard to the interest rate development. However, as of now, gray markets have reached the late cycle and start to bottom out. We still expect the late cycle impact in the fourth quarter, but based on the solid 9 months result, we currently see ourselves on track to reach our full year profit before tax guidance.
Thank you very much for your interest. Kay Wolf and I are now looking forward to your questions.
[Operator Instructions] The first question comes from Johannes Thormann, HSBC.
Some questions from my side. First of all, regarding your new business. Can you shed a bit more light how you want to jump start in Q4 from EUR 2.5 billion in the first 9 months and then get to EUR 3 billion in just 3 months. So that will be my first question, what kind of business you're targeting? And if we should expect also deterioration of the margin in this context because you do higher volumes.
Secondly, I struggle to see the logic for pbb Invest. Of course, this is a new business segment, but -- it's not started -- it hasn't started in October, but earlier this year, and the fee income trajectory is rather disappointing. When do we have to see a better fee income? Should we expect a more hockey sticker from this business for '26 or so, so nothing to expect for '25, for example? If you could elaborate on this.
And last but not least, you talk about future-proofing your commercial real estate exposure. Years ago you said hotels had no future. Now you're going into hotels. Of course, hindsight is the smartest banker, but could you at least give some more reasons why you think this is now a better strategy? What is your target volume for U.S.? And probably also you want to still do office, what are you targeting in the office space?
Thank you, Mr. Thormann, for your questions, and great to have you around again, and also to all the others in the call. Let me answer your questions around new business, your first question.
You're totally right that with regard to our target to get to EUR 5.5 billion, the fourth quarter will be a very important quarter. Answering your question, I would reiterate, and looking at the business development that we had also in 2023. The fourth quarter is always a very dynamic and intense quarter of the year. So therefore, also last year, in the fourth quarter, we had quite a substantial amount of new business being booked in that quarter. And therefore, the same dynamic we see for the fourth quarter this year.
And on top of that, of course, we see the pipeline. We are now in the middle of November. So therefore, we are very confident to reach that target.
Focus will be, and you have seen that in new business, also on extensions, we see our book, how it's developing. But there is also a new business that is coming our way.
But I would add, as you have asked for that, the key priority, as it was for the last 9 months is, for us, not on volume but on margin. So therefore, with regard to our target on the EUR 5.5 billion that we have outlined, the focus is keeping the current level of margins up that we are showing. That is the key priority.
I would then go to your third question as it refers to our real estate finance business. And yes, you are totally right. From hindsight, one could say, we have kind of underestimated the dynamic post-COVID that, in particular, fits in an asset class like hotel.
But not talk about from hindsight, let's look forward, and we see a consistent positive dynamic in the environment around hotels. And here, in particular, our focus is on city hotels, right? We don't want to go into luxury wellness hotel segment. It's the city hotels, as we see a consistent trend not only being business travel backup, but in particular, tourism traveling, has been very consistent and strong and certainly a post-COVID effect that people tend to travel more, doing more short-term trips, in particular to the normal tourist attractive key cities in Europe. And that will be a target and we see a positive dynamic in that segment going forward.
With regard to our U.S. book that you asked, strategically, we will adjust our U.S. portfolio downwards. You know that from a peak perspective, the U.S. book was at around 15% at one stage. We have already managed down our U.S. portfolio. And going forward with Strategy 2027, it will be further reduced to a maximum level of around 9% to 10% going forward.
And overall, the portfolio composition on office, we outlined in the Capital Markets Day that we want to adjust downwards to around 40%, maybe 35%, depending on how the business dynamic is developing over the next 3 years, our share of office that currently sits slightly below 50%. So we will continue to do office. And we're also considering doing office in all our markets, but we will be very selective. So we will downsize that in relative terms with regard to our new business, which then will lead to a much more diversified overall portfolio by 2027.
And coming to your last question around pbb Invest. We have set up a team. We have invested in that. We have created a product on the equity side as well as on the debt side. We have founded with roughly 100 of investors, in particular, on the debt products over the last couple of weeks. And therefore, we are very confident, Mr. Thormann, that we will soon be able to enter into real business.
However, it has to be clearly said, the feedback of the investors. On the one hand side, really appreciating in particular our debt product, seeing the expertise and the rationale of us entering in that business. But also it's clear that, from an investor perspective, they are all currently allocating their assets for 2025.
So with regard to entering and showing real business, we have clearly included that in our plan for 2025, not for 2026, yes. But that's the current status, yes? And we have very good feedback, so we are very optimistic that we are getting this business going after we have done our investments as we see that as a key pillar going forward for creating fee and commission income.
The next question is from Jochen Schmitt, Metzler.
I have just 1 question, please. On your U.S. NPL portfolio, do you have an average vacancy ratio for the corresponding office properties? That's my question.
Thank you, Mr. Schmitt, for that question. We are not disclosing that granularity in sub-portfolios. So therefore, we have no figure included in that and would not disclose on that. But there is always a correlation of an NPL and the vacancy. I think that is obvious. But we are not going to disclose that, Mr. Schmitt.
The next question is from Borja Ramirez, Citi.
I have 3 questions, if I may, please. The first one is on the capital benefit. It's great to see there the ARB benefit, so congratulations. Investors are mentioning that they -- for them and for the maximum long-term sustainability of the business model, they are -- they would prefer to see an acceleration of the provisioning and also to run down the NPLs because that is the nearest short-term point, and that would be most beneficial, speaking to the market.
So if you could kindly provide some details on how you -- that could potentially be one of the best uses of this new additional capital. So that will be my first question.
Then my second question would be on the operational metrics. So if you could kindly provide some details on your net interest income, on your costs into 2025 because the net interest income was a bit below consensus, and for Q4, based on the range that you -- based on your guidance, it seems it could be either way. So maybe if you could elaborate on short-term NII for Q4 and '25.
And then lastly, why -- I saw that the average value decline in the U.S. portfolio is now only down 25%, compared -- sorry, is now 35%, instead of 45% in the office NPLs. So if you could kind of elaborate on that.
Thanks, Mr. Ramirez. I would take your first and third question and then Marcus is going to answer on your second one. And maybe I'll start with your third one.
We have started in the first quarter to consistently report a rolling development of valuations in our books across all the portfolios. And what you at the end see is, of course, there is always a difference between performing and nonperforming with regard to the dynamic, but there is one consistency in the dynamic that we are reaching a bottom in the cycle. So with quarter -- adding quarters and moving old quarters out, we see that the percentage point of value change is coming down, which is consistent to what we see and also say, yes, that we are seeing a bottoming of the market. So our expectation is that, that percentage, if we roll it even further forward, should further come down as a reflection of where we see the current market developing.
With regard to your first question, thanks very much for your thank-you and congratulations to that. And I'd like to stress and I said that we are very, very pleased that we have done the final step in concluding our transition into Foundation-IRBA approach, and therefore, very happy.
With regard to our NPL management of that, we continue to manage our NPLs, actually Plan A on a case-by-case basis. When you see our reporting over the last couple of quarters, we have consistently -- we have been able to consistently work out NPLs, in particular, in the U.S. book. And we are, at the moment, when you look at Q3, to a degree at a turning point as well as we have been able, even for the first time in the U.S. book, to have a one-on-one exclusion, but we had also a pay down. So we have been able to really start running down the NPL book. And as a senior lending, our view is that this is, for the shareholders and for the capital, the most value-preserving way of actively managing it.
But, and there comes the but, we do not exclude consistently looking into more proactive sales on nonperforming loans. That's still on our agenda. But at this point in time, value-preserving our NPL management, as a senior lender, is our key priority. And we see our ability of making progress on a case-by-case basis, and this is currently our Plan A. But not ignoring the Plan B, as said. We are consistently in the market and looking whether we see good value-preserving opportunities for potential more proactive sale of NPL.
That has not been the case in the last 2, 3 quarters. But with changing market perception, they might opening up opportunities. But it's way too early to talk about those. I'll hand over to Marcus.
Yes. No, thanks, Borja, for your questions on NII. I mean, look, you're right, of course, you saw a EUR 10 million reduction in the last quarter. And I explained the reasons, essentially the REF portfolio coming down, mainly as a result of the portfolio transaction in May. Of course, noncore is a driver here as well. But also funding costs, as I mentioned, as we have to roll over, we were avoiding the peak, but we had to roll over. And of course, we're crystallizing some of the funding costs.
Now looking forward, I think we, of course, work on 2027 and its implementation, and therefore, as you know, the focus is, as Kay has said, margin over volume. And namely also what we said at Strategy Day, capital efficiency, right, so that you get the maximum out of each unit of capital that you apply, both in capital but also in risk-adjusted terms.
In total, that is how we want to drive, including the new asset classes that Kay repeated, NII prospectively also going into '25, and we are working, therefore, on the implementation of '27 also with a view on '25.
For this year, we've kept the outlook, as you can see, for the total NII. And for the future, I would also like to say that, of course, the composition of NII and NCI should also be supported by Strategy 2027 as we are not allocating only more efficient business into the REF portfolio, but as we are also starting to make progress on the investments that we are making to generate commission income, which, as you know, over time, should move NCI in addition to NII. That will, of course, take lead time. So I think for the moment, you can expect that NII and NCI will be on the somewhat more moderate levels that you have seen in Q3 and then benefiting from the '27 initiatives.
[Operator Instructions] There are no further questions, so I hand back for closing remarks.
Yes. Thank you very much. Not much to say as a closing remarks, other than big, big thank you for dialing in, joining us, listening to us and, of course, asking questions. So thanks very much. If there are any additional questions that might arise after the meeting, you know to reach out to Michael Heuber and the team over here. More than happy to provide more information if needed.
Otherwise, thanks very much for dialing in. I wish you all a good day. Thank you.