Deutsche Pfandbriefbank AG

XETRA:PBB

Earnings Call Transcript 2019-Q2

[Walter Allwicher, Head of Communications]

Good morning, and warm welcome from Garching. You may have noted the slight change in this introduction as PBB has moved to corporate headquarters and to Garching only recently. So you may want to take a note of that. But there is certainly more important stuff to discuss this morning, as we've just released our Q2 results. Here with me is Andreas Arndt, Andreas will lead you through our presentation and also be available in the Q&A session, which will follow the presentation. Andreas, please go ahead.

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

Yes, good morning also from my side, and welcome to the analyst call for the second quarter or half year results 2019. As Walter Allwicher just mentioned, it's the first analyst call from our new offices in Garching and for all those who may travel through Munich a warm welcome, if you would like to take a look. End of June, we already communicated the sound operating development for the first half 2019, and that hasn't changed since then. We are still targeting the upper end of our guidance or, with a piece of luck, slightly above that. A summary of development you find on Page 4.PBB shows a strong EUR 69 million in Q2 and EUR 117 million for the entire half year. Last year's figures have been slightly higher, as you may remember, at EUR 122 million for the half year 2018. But please bear in mind, and you may remember that 2018 benefited from a one-off gain in connection with the sale of debt borrowing from former Heta transaction. The underlying trends, operating trends, I think, well reflected financials are quite strong. NII is up 4% year-over-year in the year, reflecting a high strategic real estate funds volume and supported by lower cost of funds. Income from realizations were stable. Risk provisions remain low, no additions required on a net basis and general admin expenses were slightly up as planned for and expected. New business runs well and better than expected, with a 2.6% in Q2 and 4.6% for the entire half year 2019. This was especially supported by increased contribution from our U.S. business and more and higher extensions. More importantly, the average real estate funds gross interest margin returned to about 150 basis points in Q2 after disappointing 130 basis points in Q1, which was driven by some temporary effects in some more than usual low-risk profile loans at low margins as we did report in the first quarter. However, now region mix and property mix are back to our previous and targeted levels. Due to the first quarter impact, the average gross interest margin stands at 140 basis points, which should further improve as we expect coming -- the coming quarters to close at levels, which are closer to 150 basis points, which, in effect, would bring us within our original guidance for the entire year. To be clear and to be also -- yes to be very clear about that, all new business, which we write is transacted on the premise that risk considerations -- risk and return considerations [ confess ], we do not compromise on our risk profile, which you can read from the development of our average LTV of 57% now on new commitments in the first -- in the entire first half year, which is slightly lower than 58% in the first quarter or last year's figures, which is 59%, if I remember correctly. The strategic real estate finance portfolio increased by almost EUR 1 billion year-to-date and EUR 1.7 billion year-over-year. This development is especially supported by solid inflow of new business over the last quarters, and lower prepayments than expected. So all in all, it is, I think, in line with our cautious model growth targets for the entire year. Public investment funds portfolio is stable, in line with our whole proposition and value portfolio, according to plan, has been reduced by almost EUR 1 billion. Remains to be said about funding activities, which are running well despite relatively volatile markets, we generated -- originated EUR 4.2 billion so far since beginning of the year, even though funding spreads on new issues have increased year-over-year. The average issuance spread is still below maturities from our funding back book. And thus supports the NII development. Last point on this business capital, capital continues to be strong with a CET1 ratio of 19.4%, providing a buffer for specialty regulatory purposes, but also for cyclical challenges ahead. And when I say regulatory, I mean, as always, it is usual, the ECB targeted revenue of internal models, which is still underway, the EBA Guidelines and what we expect to come in terms of prices [ for ]. Review some in the context of targeted revenue are still wearing on and turn out to be more time-consuming demanding as we move along. All in all, I would say, a good performance for the first half 2019 and a good basis for the revised guidance, which we gave. Now on Page 5, you have our regular overview on the figures, the summary of figures. I will make it very short because I [ won't ] go into more details in the following pages. New business, as I said, EUR 4.6 billion well underway to reach our full target -- full year target for 2019, which, according to guidance we set out to EUR 8.5 billion to EUR 9.5 billion. Given the fact that we look at the good pipeline, it potentially allows us to be even more selective in the second half of the year. I mentioned earlier, the increase in strategic real estate funds' financing volumes, you find this reflected in the portfolio development, which now holds a 73% share of strategic portfolio all over. If you remember where we came from, say, 5 years ago, with the figure, which was, I think, close to 50% or below 50%, you see the [ way which ] we made. Interest and commission income holds up quite well as I mentioned, due to portfolio increase and due to support from the funding side, while the average margin on the strategic back book remains under pressure. Risk costs for low level given the market environment, we anticipate higher risk cost for the second half of the year, I'll come back to that. And operating costs, I think, tightly under control that as expected and as planned and communicated, we do see more cost to come in the context of investments in IT and regulatory projects as we go through the second half of the year. With all that, presently, the cost-to-income ratio holds up nicely at 42%, that will certainly water down a bit in the second half. So with PBT of EUR 170 million, I think we are well on track to achieve our full year target, i.e., according to our revised guidance, upper end or slightly above the EUR 190 million. I should also mention that the ROE is above our initial expectations, which was somewhere between 5.5% to 6.5% and presently it stands at 7.6%.Brief comments on the development of markets. We see in terms of transaction values that European markets have suffered quite a bit. The CRE transaction volumes went down significantly in the first half. Notably, the U.K. had sort of a significant reduction of more than 40% in transaction volumes in the first half of 2019. That having said, the average volume still remain on a historical -- historically high elevated levels. In most markets, property yields continued to offer a significant pickup versus government bonds, especially after the latest rebound of bonds in Q2 after latest ECB communication and the election of Madame Lagarde as the new head of ECB, that supports valuations on one hand. On the other hand, we're still very low and further downwards when we calculate its volatility and valuations will also increase. However, having said that, rents and cash flows are still increasing in some markets, they're at least more or less, by and large, stable in most of the markets. And even in U.K., if you look at the U.K. market all over, it's remarkably resilient. However, that's the exception. We expect retail rents to come further under pressure. And we also would expect that especially and particularly for the U.K. markets. The vacancies remain at low level or put it the other way around, occupancy resilient and still at high levels in most of the key markets. For the U.S., we find more or less the same picture with one important deviation, and that is the transaction volumes are relatively stable. But otherwise, in terms of key parameters, more or less the same. As I said last time when we met over phone, there are a couple of soft indicators, which points away to more instability, point to the way to instability potential, and that hasn't changed either. So the yields, which we observe are on absolute [ dose ], i.e., smaller movements in cap rates caused larger leverage or higher discounts and valuations. And that is exactly what we see, what we meet when looking at some parts of the U.K. exposure. And we do see and we continue to observe some structural weaknesses that have increased due to individual dynamics, especially for the already mentioned structural changes in the retail sector, the increased share of co-working space. And the inflationary take-up of office space from booming tech sector, which book, pre book the rental space for the next 2 to 3 years to come. That's a lot of sort of spare capacity, which also [ made that rate ] if the cycle turns. Last but not least, and that's the real decisive swing factor, which I think everybody struggles with in terms of giving hard and clear predictions. That's the geopolitical and the macroeconomic uncertainties from Brexit, from trade war and the overall macroeconomic development, especially in Europe. So given that and looking at that, we remain highly selective in what we book as new business, and we continue to focus on quality. With that, let me go to Page 9, which is a brief summary of our P&L. As usual, I will focus on the lines, which I don't comment in more detail thereafter. So NII remains strong. Risk provisioning, operating costs on low levels, but I come to that on the next pages. So some details on those issues, which are not further detailed thereafter. The results from fair value measurements of EUR 7 million is mainly driven by negative pull to par on derivatives with minus EUR 9 million, which was partially compensated by positive interest-related valuation effects on nonderivatives for the plus EUR 3 million. Please bear in mind, if you see the swing from plus EUR 4 million to minus EUR 7 million, that last year's figure did benefit from one-off in that category, which was related, as I mentioned, to the opportunity, which we had, to sell Heta tech warrants. Other operating result is -- well, on a futures is minus EUR 2 million, not much to comment on that. As far as comparison to last year is concerned, last year's figure was burdened with some legal provisions. Depreciation is also fairly stable and in line with what we prepare -- what we prognosticated. Partially -- the increase, which you see is partially driven by the fact that we shortened the write-down period from 5 to 4 years, partially explained by the fact that we have more projects and partially explained by the IFRS 16 effect on the inclusion of depreciation of lease rights according to IFRS 16. Now bank levy and contribution to the deposit protection scheme is very much what we saw before, EUR 22 million. And those were, I think, the usual items. With that, I would turn to NII, Page 10 and give a few more comments on that. Now the first point, I'd like to underline is, for the EUR 9 million increase, EUR 220 million to EUR 229 million is that the net NII development has been supported by funding costs. As the new issuance spreads are still below legacy cost of maturities, even though having increased in line with the general spread widening in the market year-over-year. What we do observe is that more specifically, and more particularly is that we did save funding costs on deposits, both in terms of volumes and in terms of margins, we did decrease the pricing on retail deposits. And the second point is that the structural change from nonpreferred -- senior unsecured nonpreferred to preferred to the tune of EUR 3 billion, which we reduced on one hand and the increase on the other hand, did give us a significant advantage in funding costs and lowering our overall funding cost. That's one observation. The other observation is that looking at the second quarter and the ongoing funding activities, we have already sort of moved back to levels which we did observe first quarter 2018, while the first half year funding cost on Pfandbriefe was still up 18 basis points. And the senior unsecured was up 26, we do see now levels of minus EUR 4 million on countries, if we're taking countries and plus EUR 46 million on secondary market estimations for the senior preferred issuances. So we seem to be going the same cycle there. On an average basis, first half year increased costs, but still below the average funding cost of the bank. So that's the first impact. The other -- second impact on NII was average strategic portfolio organically increased by EUR 2 billion, benefiting from strong new business, especially in the fourth quarter of 2018, accompanied by less than -- or lower-than-expected prepayments. That basically leads us to the fact that the net portfolio margin. So the margin over the entire book, strategic and nonstrategic, remained stable year-over-year. Due to the growing share of our strategic real estate finance book and reductions in noncore, and the -- and that's also to be said, still rolling off of higher-margin maturities on our strategic book on one hand, but lower funding costs on the other. Also negatively -- NII has been negatively influenced by the usual suspects, and that is as interest remains low, the carrier, which we realized from equity book and liquidity book remains under pressure and so were the flows, which are implicitly written in our business. And to give you one example on our equity book, we did release -- we did have maturity of one of our larger investments on the equity book in the first quarter, which resulted in a EUR 3 million to EUR 4 million drop [ and carried into ] the second quarter. To summarize, NII developments or trends, growth of the strategic book and lower average funding costs support NII, while pressure on real estate finance margin on the back book, low returns from flows, significantly low interest on equity and liquidity book were negative on our NII run rate. And the fact that it also should be mentioned that we doubled cash reserves a year into now to EUR 2.8 billion did not help, but is a necessary step in view of some larger refundings, which we expect the second half of this year. So much on NII, on realizations, I think I have mentioned that EUR 16 million, that's EUR 1 million more. It's composed of higher prepayment fees on one hand, which were offset by lower income from redemptions on liabilities. In terms of volumes on prepayments, it's about a third less than we did experience in the first half 2018. Now let me turn to risk costs, which is Page 11. On one hand, we do observe EUR 4 million net additions at stage 3, resulting from further cautious value adjustments for retail properties in the U.K. of which EUR 3 million were offset by [ releases ] in stage 1 and 2 mainly due to positive effects from maturities and property revaluations. Last -- yes, and on top of that, other loan loss provisions were [ released ] by EUR 1 million. So we have 2 offsetting effects, which gives us a 0 net income from risk provisioning. Risk provisioning thus far remains well below our guidance. However, given the overall market situation, we still include the full year plan figure for 2019 in our guidance, which we always indicated somewhere around 10 to 15 basis points on our real estate portfolio, which, again, I mean, for those arithmetics over the calculator, it translates into something like EUR 25 million to EUR 30 million risk costs. We do anticipate higher risk cost for the second half of the year, same way as we did in the previous years. In the last years, we have no imminent cases, which suggests a higher take-up of risk cost. But we stayed in principle, in general, cautious in view of the risks, which we anticipate for the second half 2019. So in summary, stage 1 and stage 2 risk cost to profit from an overall stages to positive situation in commercial real estate markets, reflecting good cash flows, high occupancy, stable values and stable also to better PDs and LGDs. Stage 3 reflects some structural problems such as the valuation for shortfalls in the U.K. while the overwhelming majority of the portfolio is based on strong debt service coverage ratios and good LTVs. Let me take you to Page 12 on operating costs. Operating costs are slightly up mainly driven by nonpersonnel expenses. Personal expenses are quite stable at EUR 57 million with only marginal fluctuations in the number of FTEs. Nonpersonnel expenses up to -- from EUR 32 million to EUR 36 million mainly driven by IT, regulatory-related costs as well as investments in our digitalization initiatives. Please keep also in mind that last year's figure benefited from a release of provisions for completed projects. Even though we manage our baseline tightly, we will see further cost increases from regulatory projects and digitalization initiatives going forward, which, by and large, we will book under investments to be done, necessary investments, which pay back over time. If you look at the top -- but if you look at the bottom left-hand side of the chart on Page 12, you see that typically and traditionally, in the third and fourth quarter, you see some pickup in cost. And I think it's fair to say that we would expect similar patterns for the second half to come. A few additions to new business for those points, which I haven't mentioned so far, I think, mentioned that we can stronger -- we'll come out stronger-than-anticipated and higher than last year's same time with the EUR 4.6 billion in the first half and the lion's share of EUR 4.4 billion related to real estate funds. To underline the point again, the average real estate fund's gross interest margin and real estate funds returned to about 150 basis points in Q2. As you know, and as you remember, we had a lower figure of 130 basis points in the first quarter due to some temporary effects and a more than conservative profile in the first quarter. In the second quarter, the region and property mix is back to previous levels, i.e., lower share in France, higher U.S. share, which now sits at 15%. You may remember, we were at around 9% or 10% in the first quarter and higher retail share, which is now at 12%, were 4% in Q4, which was well below any long-term average. So that's the blended average gross margin for the first half year, it's now at 140 basis points. And as we hopefully carry on with the results of the second quarter in gross margin -- gross interest margin, you will see us approaching an average margin for the entire year, which is close to or well within the guidance which we gave before. Again, we do not compromise on risk profile, average LTV for new commitments is 57%, as I mentioned before, and we continue to remain cautious on U.K. and retail. You can see by the comparison between new business and portfolio on regions and property types that by and large, we're trending to more conservatives -- to conservative structures. If you look at property types, the chart on property types, we see 54% new business on office as opposed to 44% on stock. That shows that the complementary views on retail 12%, whereas on stock we still have 18%. So strategically, we reduced that portion and increased further residential, which has 21% on new business and on residential portfolio 19%, so slowly it will increase. And the same exercise for the regions. All over Germany, still holding strong; France, I would say, with a stronger emphasis [ that ] we had on the portfolio; U.K., that's notable, down to 8% in new business and 13% in stock or on portfolio. If you look back, say, 1 year or 1.5 years ago, we usually had new business share of U.K. business around 20%. So that's been significantly readjusted and the United States, according to plan, 15% share of new business. That's significantly up against last year, and that's where it should be. The next page is on segment reporting. The segment's basically more the general development. So we'll more or less skip the page, we'll just get 2 additional hints or 2 additional comments. The cost relief related to reorganization of public investment findings is expected to come through in the second half. And the second point is last year Value Portfolio segment benefited from the already mentioned Heta gain, that's where the asset was allocated. So a brief look on to the portfolio. I think it is very much the picture, which you know, and which you have in view, the average LTV stands at 54%, which is, again, slightly down with only small fluctuations in the different regions. And if you look over time, you see -- actually that the fluctuations itself, they're coming less. 2 comments on Italy and the U.K. With the recent political turmoil, spreads are rising again, there's a fluctuation from EUR 230 million in June last year -- sorry, this year to EUR 115 million, July so it's creeping up again to EUR 160 million to EUR 170 million. However, the valuation effects on the exposure, which is a EUR 1.5 billion is nominal on the Value Portfolio has only a small impact on the P&L, as communicated before because the exposure is largely booked at cost -- amortized cost and accounts for only EUR 80 million on the fair value P&L, which is about 5% of the total. So we consider ourselves relatively new developments on the Italian side and just to remind you on commercial real estate and the real estate funds portfolio, we have only the small leftover, which is what we provided for [ surveys ] , no further effects to be expected. Again, on the U.K., we remain high selectively cautious. I think important to know is not only the LTV, but I think we mentioned last time, the interest coverage ratio, which stands at about 300 basis points for the U.K. portfolio and even a bit higher for U.K. retail portfolio. Now as a subset to the portfolio you have on Page 18, the actual state of the sales on the nonperforming loans. We're now down to EUR 205 million mainly driven by the removal of the Estate UK-3 exposure. As you know from our communication on the 28th of June, we expect opinion supports the bank's view and all material aspects and allows for [ full and ] loss allocations to the CLN holders, the expert, thereby fully affirmed our position and on that basis, we will fully allocate all losses to the credit link notes at the next possible date, which is the 20th of September. That brings down the NPL ratio to 3%. Funding. I made already a couple of fundings. Let me sort of reiterate and point out to the key developments as follows. First of all, funding assets remained strong, with EUR 4.2 billion after EUR 3 billion last year, same time, that shows the sort of origination power, which the bank has in markets, despite the fact that markets were volatile and despite the fact that the -- yes, despite the fact that the markets were volatile. The funding remains also strong in the second quarter with EUR 1.5 billion. We did focus very much on foreign currency to -- as a major trend, anyway, to focus more on direct funding than on cross-currency across currency protection. We did issue USD 600 million Mortgage Pfandbriefe benchmark in May, CHR 125 million unsecured benchmark in June. And in addition, did NOK 1.5 billion also recently. The interesting thing is that despite the increase on average funding costs, all these issues in the second quarter of 2019 came out quite effective in euro terms and were below our average funding cost for the entire half year. All in all, total funding volume, as I said, very satisfactory. The funding pattern, and that's the funding cost were determined by the following considerations or observations. As I said, the average funding spreads were driven by market development over the last 12 months and saw significant widening and the significant volatility aspects since mid-2018 and the recovery in the second quarter 2019. The [ banks ] did suffer or profit, however, you want to see it, several profit from these developments in 2 ways, which determines our funding costs in the first half, timing wise and in Europe volatile markets in the first quarter and first quarter '19. And in view of significant maturities, second half of 2019, we decided to prefund a significant portion of the business. And therefore, we -- if you want to put it this way, we bought a peak, but that's what we count under cost of being cautious. So I think we did right in volatile times to secure as much funding as we could, and as we need it. And the second observation is also related to the level of funding costs, which we have to carry, while ECB indications have driven down interest in southern states significantly, bank spreads in general, did not follow suit to the same extent. Medium-term issuances, i.e., 4 to 5 years' work on a negative base with a small spread and resulting in zero negative carry. And that does not sell well at institutional levels. So that's, from our perspective, either leads to longer durations, which we do not necessarily need or to relatively higher spreads, and that's something which determines funding costs as well. Still, with all that, I have to point out that even it's somewhat elevated levels, average issuance rate remains further -- remains below the average funding cost of the bank presently. And the other point is the leverage has come down in the second quarter, and that's very much so. Historically, I mean, looking back on the first half 2019, Pfandbriefe spreads widened to something like 18 basis points on average, where unsecured spreads were up by 26 basis points. If you look at second quarter and actual secondary market spreads, we are back to roughly 46 basis points for senior preferred and on mortgage [ countries attached the latest task ], which we did right were between plus 2, minus 4 [ at ] on spreads as we could see in this market actually realized.You see that also on Page 21 as our usual depiction of development and the [ pits and pillows ] , which I just described I'll leave it at that and come to Page 22. Page 22 is just to illustrate; A, that the bank continues to provide significant bail-in buffers and covers an 80% (sic) [ 8% ] TLOF ambition level almost entirely from equity and subordinated capital. B, that senior nonpreferred is almost twice as much as we required under a 8% TLOF base MREL ratio; and C, that even with a full stock of any nonpreferred issuance, we would provide the bank or respectively, its creditors were paid in the book pushing for the next 5 years without doing anything. And that's in some irrespective of the considerable buffers, which we continue to keep on issuing nonpreferred to -- we will continue to issue nonpreferred to the extent that is needed to keep the bank current in this market and to ensure that we stay comfortably above our ambition level of 8%. On capital, which is Page 24. Capitalization continues to stay strong on CET1 levels with 19.4% after 18.5% at the end 2018. The main driver is further reduction in risk-weighted assets to EUR 13.6 billion compared to EUR 14.6 billion before, while our capital position remains nearly unchanged and stable. There are 2 opposite and diverging developments to be seen. On one hand, RWAs on our strategic portfolio increased, but not to the extent as the nominal increase in portfolio may suggest as the risk base for new business were below the risk base for maturing business, which should not surprise given the conservative structure of our new business intake for the last 6 months. On the other hand, that's the other direction, the segment development was overcompensated by valuation-related technical effects, the revaluation of collateral, inclusion of additional collateral, which so far was not fully booked as well as other technical effects such as duration and exchanges, which did lead to a positive LGD changes and did help RWA figures. To prevent later questions, an increase in present CET1 ratio does not indicate more leeway in capitalization. As mentioned many times before, we expect visibly higher risk rates from; a, the finalization of the still ongoing and increasingly intensive targeted review of internal model exercise of the ECB and the implementation of the new EBA guidelines for IRRBB models; and b, the expected EBA Basel IV effects driven by the recalibration of risk parameters. All in all, and based on current estimates, we expect these effects to result in an RWA increase of around EUR 4 billion to EUR 5 billion with corresponding effects on capital ratios. That takes me to the outlook page on Page 26. And the summary of this presentation. I think we continued our good performance from last year. The underlying trends remain solid, with a PBT of EUR 117 million in the first half year, which again supports our positive outlook for the entire full year figures. That we already increased our full year guidance by the end of June to now at the upper end or slightly above the guidance of EUR 170 million to EUR 190 million or slightly below. What do we expect for the second half year to come, the continued low interest rate policy of ECB will further support the demand for commercial real estate investments. Even though transaction volumes have come down recently, and even though the overall macroeconomic outlook remains shaky. Solid new business levels in the first half year and a good pipeline for the second half allows us to be more selective in the second half as competition will continue to put more pressure on margins. NII is expected to stay robust for the entire year, more robust than we originally guided and expected with some sort of diminishing effects in the second half to come. Current guidance includes the full year planned figure for risk provisions. As you know from the past, it is still too early to have a clear picture towards the end. But given the overall market environment, we prefer to stay conservative, and we anticipate higher risk cost for the second half. Furthermore, as explained, operating costs will be increasingly affected by cost of regulatory projects and investments in digitalization initiatives. 2 words about the progress on our focused investment -- Focus & Invest program, centralization of function is -- functions is finalized, including relocations from London, Paris Madrid and Eschborn to now Garching, the reorganization of public investment funds is completed on the whole strategy. We continue -- third point, we continue to carefully expand our U.S. business, as I said, now fully staffed, carefully extending of our reach, and also engaging on primary market deals on East Coast. And last point, digitalization initiatives are well underway. We made good progress on CAPVERIANT in Germany and started our CAPVERIANT business in France already in quarter 2, and our current focus is building up a customer portal -- a commercial real estate customer portal and intensifying the digital connectivity with our first customers, ultimately considering the convergence between commercial real estate plans, portal solution and the platform for placing simple commercial real estate loans. So that's the perspective for the remainder of the year. With that, I conclude my presentation. I'd like to thank you for your attention, and I'm happy to take any questions. Thank you very much.

[Operator]

[Operator Instructions] We have one question registered, which comes from Nicholas Herman from Citigroup.

[Nicholas Herman, Assistant Vice President and Analyst]

3 questions, please. Just in terms of your dialogues with your customers. Is that a little bit more constructive now given the increased relative attractiveness of property given the recent fall in interest rates? I'm just interested in terms of how are you a bit more constructive on the outlook, not just for this second half of this year, but also beyond? Secondly, I'm fully aware, your loan losses clearly remained low, LTVs on new business are falling, NPL ratio has fallen as well. But in terms of your new business, you're writing, the higher margin appears mostly due to because new business was in U.S. and in retail. Presumably, you are doing U.S. retail business. So is that also another form of going up the risk curve? And then my final question, please, is on capital. Sorry to bring back some guidance you provided a while ago, but back at 4Q '17 results, you guided on risk weight inflation due to Basel IV of approximately 15%, that's [ not ] EUR 2 billion you're now guiding EUR 4 billion to EUR 5 billion, so that's a bit of a surprise considering, it looks like Basel IV has been watered down a bit. So I'm interested in terms of what has caused you to double, it had to be double in that guidance?

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

Okay. Nick, thank you very much for your questions. To start with the capital side. I mean, a, Basel IV has not watered down, not to our knowledge; b, I'm not quite clear where the 15% comes from. What I know is that we have indicated EUR 4 billion to EUR 5 billion since quite some while and we would stick to that with certain variance around that. But that's been, I think, very clearly communicated that, that is the figure, which we would expect from the triplet of [ courses ] such as targeted revenue, EBA guidelines and Basel IV. So I think there's no difference from previous and formal guidance on that.

[Nicholas Herman, Assistant Vice President and Analyst]

That must be my misunderstanding, and apologies. And just around -- on the time frame around targets to review and [ gave ] guidelines. Do you have a -- is there anything you could just say on that as well, please?

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

Well, I think I mentioned that the process is still carrying on. It's a process full of work and full of cost, that's very clear. We'll take some more time, that's our view. It's very hard to predict what the outcome will be. But it's a sort of a major exercise for good foundations [ in ] operating models going forward. So we have to go through that. But to come to any final conclusions on that at this point in time, it's probably too early. However, we assume presently that it's been well covered within the forward guidance, which we gave. Now on loan losses, new business. 2 things, one thing possibly misunderstanding on retail. What I said, we're doing a bit more in retail [ than ] a bit more than first quarter, I mean, 4% in first quarter was almost nothing. The average which we had was between 15% to 20%. We are at a level of 12% new business now. So it's very clear that we remain extremely cautious on retail, but most of the business, which we do is a prolongation or extension business on that. There's hardly any new -- real new business, which we underwrite. And there is no -- almost no retail business in the U.S. The retail, which we have in the U.S., comes packaged and parcel with office financings, simply being the case that, for instance, if you do an office building in Madison Avenue, you're pretty sure to have 1 or 2 or 3 floors of retail space, which you also have to take into consideration if you finance the transaction. However, internally, and by the way, that's something which we always regard as a discount in the overall valuation of the property, but at capital rate. So is there any retail strategy for the United States? No. The other one is on the -- I would not consider sort of increased investments in the United States as going up the risk curve as we stay very much middle of the road, we don't do sort of off-road up country investments. We stick to the 7 major places. We stick to CBD investments. So that's very narrowly defined, and it's very much within the plan, which we have. You may remember when we discussed our 2019-2020 plans for the United States, we were hinting towards 15% to 17% to 18% share of new business in the United States. And given the overall macroeconomic situation, U.S. versus Europe, we have no intention or no reason to deviate from that strategy. Now on the -- on your first point, our dialogue with the customer, that's a tricky one. Because what you basically tried to find out is how do we value, or how do we measure the interest impact on the valuation of property versus the overall macroeconomic impact on overall economy and occupancy rates and rental rates and things like that. That is very, very difficult to say. Certainly, the low interest environment and the lack of other asset alternatives, investment alternatives still has the commercial real estate market to solidify in terms of values. Nevertheless, the driving factor at the end of the day will be macroeconomics. If companies do not need office space or factory space or logistics space, that will reduce and occupancy rates will go down and rates will come down. And you see that already sort of below the surface, when you look at, for instance, the U.K. retail markets. The "check" they will have an impact on rental rates, clearly, it's there. And while the face value of rents is still going okay, the underlying value is coming down. So in a nutshell saying, we have no more or less constructive dialogue with our customers than we had before, we have our sort of daily discussion and daily fight with the customer on keeping up loan standards in terms of covenants, in terms of collateral to be supplied. And we try not to give up on something there. That's probably the best description to that point, which I can give. We do acknowledge that there is a certain -- yes, how shall I put it, solidification of the values in the market. But on the other hand, as I explained a couple of times, if you have low cap rates, small movements affect high leverage, high volatility in valuations, and we are very much aware of that, and we drive our business accordingly.

[Operator]

We have further questions registered from Benjamin Goy from Deutsche Bank. [Operator Instructions]

[Benjamin Goy, Research Analyst]

Some questions from my side as well, please. So putting all your comments on net interest income together on competition, funding and the investment portfolio, is it fair to say that probably we keep at this run rate we saw in Q2? And then 2, on the new business, basically. Just wondering [ our ] logistics is quite low in your new business. Any thoughts around that or explanations? And then residential, on the other hand, relatively high. So just wondering how can you still write business in this environment in residential new business. Is there a lot of development in there? Or maybe you can give some color where you were in which countries, you find sort of some residential opportunities that are attractive by that standard?

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

Okay. Well, as I said, and that's probably as much as I can say about the run rate of NII in the second half 2019. Given the closing development, our best guess at this moment is that we probably came out better than we did guide for NII in the first case originally, but I would be slightly cautious on the level compared to first half to second half. So would we see an increase? No. Would we see sidewards movement, may be, more likely, slightly below that. That would be my rather unspecific estimation as [ where ] we go. The second point is logistics, to be honest, we would like to do more. We still believe that's a market which is attractive. The point is it's become very competitive in terms of risk and return and many proposals, which we see, which we put back because of pricing reasons. Not so much even on valuations or business case or cash flow reasons, but pricing reasons where we say that's a margin, which is not adequate and not applicable to this kind of investment. Now residential, yes, your answer is right. There's a high share of development loans in that part. It is something which we do in almost all of European countries with a certain emphasis on development loans in Germany. That increases overall margin on that part. The interesting point that many of these residential developments that are presold are forward deals, where the buyer has already and takes off before we actually start doing his development. So in that respect, the higher margin is more caused by the fact that the developments are usually high work, high workload engagements. It is not necessarily higher risks associated with that. But it's -- from that perspective, it's still interesting and attractive opportunity, especially because residential tends to be -- if you do it well and choose the right transactions. And it is more risk resilient going forward and it shows less volatility going forward. So the other countries where we do residential is France, predominantly a little bit in the United States.

[Operator]

At this stage, we have no further questions registered. And so I suppose it's fair to say that we have to follow up. And next question comes from Philipp Häßler and then we have again Nick Herman from Citigroup. Philipp Häßler from Pareto.

[Philipp Häßler, Analyst]

Philipp Häßler from Pareto. 2 questions, please. Firstly, on the tax rate, which was very relatively low in the first half, it's 15%, if my math is correct. What do you expect for the full year? And then secondly, on dialogue with customers and your expectation regarding new business margins, if we see or if you may see, no deterioration, somewhat of the real estate market due to the economic slowdown, would you also expect margins to increase? Or would this take longer result? First, we would have to see higher defaults and then like maybe with the time lag of some 6, 12 months, we would see margin improvements, maybe you could share your thoughts about this development or this [ connect ] with us?

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

Okay. Well, on tax rate, very brief. It always consists of, say, effective -- effectively paid taxes and the deferred taxes, we had a higher share of deferred elements in that, which brought us down to 15% for the entire year, we stick to the guidance, which we gave around 15% to 20%. On the dialogue with customers that is another of these very existential sort of questions. What is the margin going up. The interesting thing, the interesting observation is margins usually go only up if the supply comes down. So if there's a significant tightening of credit conditions, which typically takes place a little bit later in the cycle, which would point at your comment, it's probably lagging behind some time before the cycle and the downturn of the cycle sets in. And that would be also my expectation.

[Operator]

Next question comes from Nick Herman.

[Nicholas Herman, Assistant Vice President and Analyst]

It's me, sorry the line cut. The line cut, yes. I just really got one quick follow-up please. I think it's pretty minor, [ if you do ], but I just want to just double check, just the completeness, did you have any provisions on balance sheet for UK-3 that you're testing, might look to release what now, that it's all done, or is that all complete, is that all?

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

No. That's all done. We've basically written down the loan now. What we have had in terms of first impact in IFRS implementation, the measures we have rededicated to other risk points and therefore, no further effects are to be expected.

[Nicholas Herman, Assistant Vice President and Analyst]

I see, we just reallocated as a more of a general provision model than from a specific one then?

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

You can put it this way.

[Walter Allwicher, Head of Communications]

I'm hesitant to say, we are through. And -- but at least, it looks like it right now. So thanks for sparing the time this morning and to discuss Q2 results. With that, we appreciate your interest, and we look forward to speaking to you later when we'll release Q3 results, which will be in mid-November so we're positive and look forward and to stay in contact with you in the meantime, so take care. Bye-bye.

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

Thank you. Goodbye.