Deutsche Pfandbriefbank AG

XETRA:PBB

Earnings Call Transcript 2021-Q2

[Walter Allwicher, Managing Director of Communications]

Good morning, and a very warm welcome from Garching. Thank you for joining us for our Q2 results call. Here with me is Andreas Arndt. Andreas will present the results and will also be available for your questions after his presentation. Andreas, the floor is yours.

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

Thank you. So welcome to pbb's Analyst Call regarding second quarter and half year results of 2021. Thank you for joining today. A few days ago, we have already communicated the key figures for end of -- or by end of July when having raised our full-year guidance, and we are happy to provide you today with some more details around that. The key topics or the key observation points for the first half '21 are the combination of first, stable operative results; second, better and more lucrative prepayment income; and third, more focused and contained view on risk provisioning second half of '21 which altogether leads to improved guidance for the full-year '21. pbb remains well on track with a strong PBT of EUR 62 million in the first -- in the second quarter, and EUR 114 million for the half year, once again, based on stringent selective and conservative business approach. In all, this provides good basis for increased PBT guidance even though we cannot exclude any delayed impact from the pandemic developments in the second half of the year, we are reasonably optimistic to now reach a better PBT of EUR 180 million to EUR 220 million, which is our guidance. On Slide 4, you see the usual summary of highlights for the second quarter and the first half year '21. As just mentioned, the PBT is at EUR 62 million in the first -- in the second quarter, which brings the half year up to EUR 114 million, both significantly up from last year's figures of EUR 28 million or EUR 30 million, respectively, which were both strongly impacted -- the half year at least strongly impacted by COVID-19 related effects. NII plus NCI is up more than 9%, continue to benefit from low refinancing costs and higher floor income. In addition, again, some support from prepayment fees, net income from realizations accounts for EUR 17 million in the second quarter after EUR 21 million in the previous quarter, which brings up the half-year figure to EUR 38 million which again is almost twice as much as we had in the last year at that time. Administrative expenses are slightly up in line with our expectations, which translates into, I think, a very competitive cost-to-income ratio below 40%, i.e. 39% to be precise. Risk provisioning of EUR 23 million in the second quarter remains on moderate levels with the half year going up to EUR 33 million, which is significantly down against last year, which stood at EUR 70 million as of end of June 2020. It is predominantly model based provisioning, stage 1 and 2, where we maintain our conservative buffers and have not yet released the management overlays by which we counterbalance model-driven releases. New business carries on solid levels while continuing our selective part, EUR 1.6 billion is the figure for the second quarter at stable conditions all out, i.e., an average LTV of 54%, which compares to 54% the previous quarter and an average of 54% in 2020 at an interest margin -- an average interest margin of 170 basis points, which again is the same trend figure, which we saw in the previous quarter. As a result of new undrawn commitments and new prepayments, the Real Estate Finance portfolio was slightly down by EUR 200 million. We expect to catch this difference up over time in the second half as the forecast of new business for the second half 2021 looks benign. NPLs stay at low level, even though they are up from EUR 503 million to EUR 546 million. I'll come to that later. NPL ratio stable below 1%. Funding runs well. Several benchmarks were issued, strong focus on foreign currency, in particular U.S. Dollar, British pound, and Swedish krona to match our asset side, euro funding substituted by extended TLTRO participation. And in total, the market funding volume sums up to EUR 2.3 billion million in addition to what we have drawn under TLTRO, which is, by and large, the same figure, which we had at the same time last year. Capitalization remains strong with unchanged [ but abated ] for calibrated CET1 ratio of 15.4%. Operations are still excluding net profit items, which are earmarked for attention and the full recognition, these ratios would be trending higher. On dividend, as you know, end of July, the ECB communicated not to extend its recommendation on dividend restrictions beyond the 30th September. We welcome this decision and well in line with the conditions set out by the ECB have a decision on a potential further dividend payment in -- for 2020 early in fourth quarter '21. Any such decision will truly reflect the guidelines [ set by ] the ECB from the letter of the 23rd July, where banks are asked for prudent application of the newly regained degrees of freedom and will, of course, also reflect the bank's communicated bank dividend policy, which is 50% regular and 25% special dividend. On Slide 5, you find what I just said as a visual representation. And therefore, I will skip that page, although I like it very much, but it's basically the same figures which I just mentioned. A few words about markets, and that's speaking to slide 7. The investment volumes turned slightly upwards second quarter first time since the onset of COVID-19. Whether this marks a sustainable recovery has to be seen. The development in the United States is, as we would expect, certainly more pronounced than in Europe, where the bulk of positive momentum is mostly carried by the pursuit for prime property. While the fringes, the B and C location is still very much likely behind. While office and residential prices to the extent they are being considered prime are holding up prices and return low yields, while logistic properties still outperformed the rest property values in retail and hotel sector remain stressed, although stabilization can be observed. Both property sectors continue to be affected by consolidation and structural changes we discussed this year in this round, many times that in principle has not changed. It is on the high-end shopping centers, we see less, every one's fashion more turn towards showroom space more or less and restructuring into residential space for ordinary shopping centers, less fashion, more or less [ investments ] also here. And with regards to inner city shopping centers restructuring into residential space is also a movement, which is to be observed. And the other one, which is the sort of ongoing topic on the list is hotels. Travels. Business travels are still down and conferences are even further down, which means that the occupancy rate also of central city hotels, central locations is still very low, with sort of rebound expected not before end of '22 more into early '23. Forecasting office yields and prices remains a challenge. Despite rising vacancy rates, higher hidden vacancy or higher sublet ratios, some of the structural consolidation from an increase in share of the remote work. Office yields remain remarkably resilient. And in case of prime rents might even be trending lower in some exclusive, very exclusive locations. One reason certainly is the unchanged low interest policies. One other reason on top of that is that the gap or the pick-up between the long-term yields on bonds and government bonds and the prime yields you can achieve in the market still holds at 3% by and large. But there's also the search for prime assets with long-term stability, [ value ] stability, which accounts for that development. And finally, we see that working from home may require a space at office. But we also believe that the jury is still out when it comes to the question how much more space employees will have to make availability to stay attractive as new forms of work and co-work and teamwork with set standards and new parameters for employers, attractiveness at work and office will emerge. Residential is quite stable, not much to be said about that and logistics I mentioned. While some optimistic -- some optimism gradually seems to return, we remain watchful about developments in the second half of '21 which may cause further setbacks in form in our view, real danger to a lasting recovery. We deem it still appropriate to remain prudent in Europe second half development because the following factors. First of all, there will be expiring state support measures, especially on insolvency release. Secondly, we do expect delayed effects from labor markets, i.e., unemployment and insolvencies and subsequently effects on rental markets. And we would also expect that some of the client agreements on covenants and amortization re-leases and things like that, which were contracted second half of 2020 now come to expire and will have to be newly assessed. So with all that in mind, we stay cautious. But we would like to also make you aware of 2 other factors, which we have tried to depict on slide 8 where further future structural changes play a role. And the 1 of the 2 aspects describing the present commercial real estate challenges is the question, are we looking at a substantial growth, price adjustments and subsequent recovery of pricing levels? Or do we have a phenomenon of more structural kind? And what does that mean? How does that affect the markets going forward? That's the first question. And the second question is the question of sustainability. What is the role and the impact of new environmental standards and environmental risks on property prices? 40% of all carbon emission worldwide every year stems from building and construction industry. It is highly likely that this will find special attention by lawmakers and regulators by forcing investors and banks which finance buildings and constructions into new standards of building and new standards of greenness, which will affect future prices significantly. The question is how and to which extent and when? The question to -- the answer to question 1 seems very obvious now. The price changes which we observed are mainly structural in nature and not the consequence of cyclical macroeconomic developments. It is rather about changes in shopping behavior and working behavior as much as we discussed it by now. And of course, it is about high liquidity and investment pressure amongst investors, which leads to high demand and to the flight to quality. In this context, regarding question 2 the long-term resilience of property values comes more into focus where sustainability and a green profile of investment comes into play and ESG conformity becomes positive differentiating factors as ESG conformity is becoming increasingly important. The first indications in real estate markets can be observed by a better lettability of ESG-conform properties with regards time to let as well as rental income. And secondly, furthermore positive effect on stability of property values versus from brown real estate, something which is likely to emerge over time. The consequences in our view are twofolds; greener sustainability become more prominent in credit decision on new business. Hence, our green loan initiative and hence, green asset ratios which are about to be introduced by regulators; and the other one is green [ as ] sustainability play more evident in the important role in the bank's risk and portfolio management going forward, reflecting environmental risks to the bank. Our green bond framework is in place already since last year. We successfully issued first green bond beginning of the year and will continue to do so. Our green loan concept is about to be finalized and will be launched for a quarter. The criteria applied here will be in line with current markets and current developments more strict than those applied to green bonds. The interesting question will be how much and to which extent can investors be used or convinced to change towards more sustainability in their investments. One of the obvious obstacles is the mind-boggling diversity in green criteria from any sort of taxonomy from that involve constituencies which makes it almost impossible for both banks and investors to make rational investments today about investments [ to dollar ] tomorrow being compliant with regulatory demands the day after tomorrow. In any case, we're convinced that Green becomes the new standard for more stable demand and resilience of property values and hence for new opportunities in our lending business with regards to structuring and products. That takes me from here to the financials, which you find on Slide 10. Some comments on a few lines which we won't deal with in detail on the fourth coming pages. Small figures on fair value measurement, hedge accounting, operating -- other operating income and write-down on nonfinancial assets. With regards to the differences or the fluctuations against last year. The only noteworthy line is net income from fair value measurement which is significantly up from minus EUR 16 million to plus EUR 2 million this year. But the minus EUR 16 million were already is computed by second half 2020 and were discussed at that time. Bank levy is another point to mention. Bank levy and similar expenses account for EUR 29 million first half, which is about EUR 4 million higher than last year, mostly reflecting increased requirements on EU level following the everlasting and ever increasing levels of site deposits on one -- as one effect of the pandemic crisis, increased demands from national deposit insurance schemes regarding greens have been accounted for in first quarter, and we don't expect further effects from them to follow in the second half of '21. The tax rate, that also should be mentioned, the tax rate stands at 15% effectively and benefits from change in accounting treatment of deferred taxes. The full-year tax rate '21 is expected at around 20%. The main income line starts on Page 11 with income from lending business and NII and NCI, which remains robust, slightly up quarter-over-quarter, but say, more significantly 9% up year-over-year, which is basically affected by lower refinancing costs and improved floor income, as I mentioned. Refinancing costs continue to be supported by TLTRO participation, which by ECB was extended into 2022, and which did see a some pickup on our books and our volumes, which we contracted from EUR 7.5 billion to EUR 8.4 billion which has basically mainly to do with the fact that ECB allows for a higher reference portfolio, which we make use of that did not fully exhaust. Floor income benefiting from continued low interest rate environment that is going on and thankfully going on. The good news is that the real estate finance average gross margin on the asset side, on the client side has been kept stable over the last few quarters. All those 3 components, which are sort of turning on the positive side, compensate and overcompensate for the continued downward pressure, which we have toward the value portfolio rundown and the lower contribution, the still lower contribution and wind income contribution from the equity book. Net fee and commission income, as you can see, is slightly up. The other sort of swing factor between last year and this year, apart from NII and apart from risk cost is the net income from realization, which is supported by significant prepayment fees in Q2 and in Q1. EUR 17 million for 1 -- '21 for the first quarter, which brings up the fee income to EUR 38 million, which is about twice as much as we saw last year. The higher level of prepayment fees as shown this year is mostly driven by individual situations of a few clients. The volume, which is attached to it is only moderately up while, as I said, the fee income has more than doubled. The other determining factor is risk provisioning and administrative costs, speaking to Slide 12 and starting with the risk provisioning. It stays at moderate level with EUR 23 million in the second quarter and EUR 33 million for the entire half year, which is significantly down from last year's figure of minus EUR 70 million. The additions to stage 1 and 2 amount to EUR 20 million for the half year, and they're mainly driven by deteriorations of PDs on very selected individual business partners as well as the higher new business which we underwrote, which, again, sort of overcompensated releases from improved parameters, especially on the LGD side. And of course, the normal course of business for repayment and maturity effects. The pro rata model-driven releases accounted for EUR 38 million, for which we again applied management overlay due to the remaining uncertainties of the second half '21 which we derived from or expect from delayed impacts from COVID-19 pandemic. As mentioned before, expiring state support measures in solvency and labor markets unemployment developments, and subsequent effects of rental markets would potentially have negative accounts -- negative effects to be accounted for. There are no further management overlays applied. And there were no, as you know, there were no earlier risk relief measures applied by the bank. Additions to Stage 3 amount to EUR 8 million in the second quarter and EUR 13 million for the entire half year. Again, mainly resulting from further adjustments to U.K. shopping centers and some minor provisioning on assets in Germany and a very small topic which is a long-time heritage building, so to speak, heritage from earlier times, which we still have in Italy. There's no fundamental shift in our assessment of invent risks of these books, but there was need for some adjustments to the tune, which I just mentioned. We had 1 additional default, 1 hotel in the Netherlands was put into default after technical excess of 90 days past due. There were no risk provisioning required as the past due amount has already been paid, and the engagement is expected to be removed from the NPL list after the usual probation period of 3 months. All in all, we maintain a significant stock of risk provisions with the coverage on our Real Estate Finance portfolio slightly above 100 basis points. Since half year -- second half year 2019, we have at least, and I think that's a significant figure for us we have at least build up more than EUR 200 million in additional risk provisions and therefore, EUR 170 million out of the EUR 303 million stock are related to general loan loss provisions in Stages 1 and 2. Operating costs, that's Page 13, are furthermore kept under control despite all the headwinds which we have, general admin costs are slightly up as we did expect. Personnel expenses moderately, very moderately up, mainly driven by IT in-sourcing and ramp up of capacities for regulatory projects in 2020. The positive effects from in-sourcing will be seen in 2020, earliest, by the way of lower admin costs. So that is a sort of bundle wave, which we pushed through the P&L in the first place by taking on more IT in-sourcing capacity with a relief to follow up in the following year. Non-personnel expenses up by EUR 4 million, reflecting [ higher costs as mentioned, the regulatory projects ]. One explicitly to be mentioned project is the Real Estate Finance client portal, which has been launched in March. We told you so, in the -- is our digital interface between clients and pbb. It gather space, meanwhile, in terms of client onboarding, but I will not go into further details as we discussed this already in first quarter. That all together brings us to a cost-to-income ratio of 39%, which I think is a very competitive level which we can show. On Page 15, you'll find the details on new business. We are continuing and we carry on with our selective approach despite increased competition for prime properties. We continue to produce new business stable -- new business figures at stable margins. And in the second quarter '21, we originated Real Estate Finance new business volume to the tune of EUR 1.6 billion at stable overall conditions, i.e. 54% LTV with an average margin of 170 bps which is exactly bang on with what we did show in the previous quarter. There are no further -- no new commitments on property types of tenants in retail shopping centers since March 2020, except for the extensions, which we did allow for and extensions, no news about that. They have been affected on a conservative basis only and in any case, no forced extensions. Regions composition, the regional focus is unchanged, primarily German business with 54% against the portfolio at 46% followed by France with 15%, portfolio figure of 13%, and CEE 10% and portfolio 6%. Low ratios, low contribution from the United States, but I hope more to come. presently with 7% and portfolio at 10%, but we have a good pipeline in third, fourth quarter, and we do expect more business to come from that side. And U.K. in terms of staying within expectations, 5% new business and the portfolio, 11%. You can imagine the strategic shift, which we affected there since Brexit and where the business -- new business production in the U.K. stood at way beyond 15% more on the 20% side and now stopping at 11%. So that's a structural change. We hope that's going to change to some degree in 2020 while things have eased and calmed down in the U.K. We are more than willing to do more business there, but again, on a very cautious note. With regard to property types, main focus is on office and remains on office with 42% despite all the question marks which are around this asset class, residential is 17%, logistics for that quarter is only 6% which brings us down to 19% for the full half year, which is closer to the, say, long-term trend, which we have on that business. Retail and Hotel, as I mentioned, further pulled down. The deal pipeline remains good. supporting solid new business volume for Q3 at stable margins so far as we can see, and we look at that on a daily basis. We, therefore, stick to our targets, which is between EUR 7 billion to EUR 8 billion with an outlook, which is rather on the upper side of the guidance. And we continue that just as a matter of completeness and to repeat what I said in earlier occasions, we continue to concentrate our investments on the 3 primes, which is property prime, location prime, and sponsor prime plus low LTVs plus strong covenants. There is no real change in our course of action. Page 17 gives you a overview on where the portfolio stands. Risk parameters, I repeat myself, continue to reflect our selective and conservative approach. Average LTV on the portfolio is against -- reduced now at 51%. LTV changes in regions and property types are driven by repayments, prepayments and new businesses but are not structural in value. And the expected loss classes also show a very stable development. There are no major structural shifts to be observed, smaller ones occasionally. But we also see that despite sort of revaluing the entire portfolio within the last 12 months, we did not have need for significant adjustments in terms of EL classes throughout that period caused by corona. And to sort of finish up on that point, there are no further corona-related cases on our portfolio, which were not known and not analyzed before on the contrary engagements under special corona observations, which we've talked about last time. So the engagement and the corona observations were reduced by approximately 1/3 since early '21. While we stay cautious regarding third and fourth quarter developments, we have no imminent significant cases on our books, which may warrant a new risk assessment. Still staying with the portfolio on Page 18. Although we have an increase in NPLs, it remains at low levels and the NPL ratio stays at 0.9%. There are 2 cases, as I mentioned, the one in the Netherlands with the hotel, which was for technical reasons and it's remedied by now. So most likely to come off probably fourth quarter and if not fourth quarter than first quarter next year. And the other one is also mentioned the EUR 30 million shopping center, small shopping center in the north of Germany, triggered by covenant breach with a small addition to provisioning, which is below EUR 2 million and account for under Stage 3, I mentioned earlier. So that gives a gross increase of EUR 70 million against which EUR 30 million are to be accounted in terms of repayment of loans and FX values so that the net change in NPL volume is about EUR 40 million as to the detail, which I just set out. The, I think, still ongoing good asset quality, the operative resilience and stability were also confirmed by recent ECB stress test results, and we have noted that for you again on Page 19. You may read the results in full detail on the ECB website. The more salient points which attached to our business are depicted on that page 19. After applying those stress test conditions, pbb was allotted to the second best bracket for all banks in all rather than categories, i.e. the depletion rate the CET1 and the leverage ratio as tested and stressed by the ECB. All those ratios all stressed and specifically, the stressed CET1 ratio remains well above our SREP requirements. And I should point out that phenomenon the maximum CET1 ratio depletion at pbb sits in the 300 bps to 600 bps bracket and is well below the average figure of 5.2 points of all 89 participating banks and as such, is also significantly below the average of German banks and the average of 51 midsized ECB banks, which stands at 6.8%. That is to pre-warn you at this point in time for discussion probably or questions to come. That is as much as we can say about the more or less precise positioning of the bank in terms of depletion rate. Now funding runs well. Page 21 and 22, with solid market funding volume of EUR 2.3 billion, which is bang on with last year's figures at that time. And we continue to focus on non-euro Pfandbrief and senior preferred issuances. Strong focus on currencies, U.S. dollar, British pound and Swedish krona to match our asset side and to provide direct hedge and to reduce cross currency swaps. Several issuances -- several benchmarking issuances successful place -- successfully placed in capital markets over the last 6 months. We did USD 750 million Pfandbrief, GBP 500 million Pfandbrief, and the EUR 500 million Green Senior Preferred. We did not have euro Pfandbrief this period due to the fact that euro is sufficiently covered by TLTRO participation, which I mentioned already. Funding spreads for new issuances remained relatively uneventful, which you see on page 21. Now Capitalization remains strong. That's Page 24 on an already base for calibrated basis at 15.4%. As I mentioned, risk-weighted assets was slightly down, partially due to the reduction in real estate finance portfolio. And the capital as such was slightly down from a number of technical effects, which did result in the 15.4% CET1. Now let me summarize. pbb remains well on track. We do have and we continue with our strong operating performance, especially on the top line. which is supported by higher NII and higher prepayment fees and lower levels of risk provisioning. Our strategic initiatives continue to develop positively. We make good progress in digitalization. As I mentioned, client portal picked up speed. Currently, we cover new business with investment loans in Germany. For the rest of the year, we aim to cover total German business, new business, and first markets abroad. And we intend to complete the rollout by year-end. In parallel, we work on the expansion of functionalities in a step-by-step approach on a basis of continuous improvements instead of big bang approach. As you know, we are not only working on digitalization of the client interface, but also look into the whole credit process. Also, this digitalization initiative has started well. We just had on this week's board meeting the approvals for the second rounds, the second plateau investments in the second half of 2021, which is a significant investment and takes us much further in the progress of the project. We also made good progress with regard to sustainable funds. We have defined how to consider ESG criteria properly in our lending business as well as funding. Furthermore, we are working on the integration of climate risk into our risk management. As already mentioned before, we have successfully issued the first green bond. And in parallel, we started to build a database to offer green loans to our clients in the future. As already said, the concept is in place and will be launched fourth quarter, criteria to be applied will be in line with current market development more strict than currently applied for those -- currently applied for the green bonds. Outlook and guidance, strong PBT of EUR 114 million in the first half provides a good basis on our increased full year guidance, mainly driven by continued strong NII levels supported by higher-than-expected prepayment fees and so far lower risk provisioning. Even though we cannot exclude any delayed impact from the pandemic in the second half of the year, we are quite optimistic to now reach a better PBT of EUR 180 million to EUR 220 million. So with that, I conclude my presentation, and thank you very much for your attention, and I'm happy to take questions that you have any. Thank you very much.

[Walter Allwicher, Managing Director of Communications]

[Operator Instructions] We have already 1 set of questions registered, which comes from Johannes Thormann. [Operator Instructions]And with that, we move on to Johannes. Johannes, please go ahead.

[Johannes Thormann, Global Head of Exchanges and Analyst]

Johannes Thormann, HSBC. Three questions, please. First of all, on the run rate on our NII, what you expect to be stable or slightly higher on current Q1 and Q2 levels, or on the levels we've seen in the last year's quarter, so rather in the range of EUR 125 million, EUR 126 million NII? That's my first question. And the second question is just a simple technical one on your tax rate for this year and also for the tax rate outlook for the next years as this year is probably lower and last year was lower than your 25% guidance. Is this still making sense? Or can you -- after the increasing it, can you go back to all the levels below 20%, probably in the future? And last but not least, probably you can share as you didn't specify your dividend or the potential of a dividend -- additional dividend payment at least if you can share your thinking with us? What do you think about perspective, additional dividend payment? How much it would be? What are the optionalities in your view and the likelihood of those?

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

I'll start with the easy one, which is the dividend. Now I think there are 2 things to be observed. First of all, we have always said we place ourselves in the market by market reputation as a dividend-based stock. And we have an in-place dividend policy, which is -- which effectively amounts to 75%. So 50% plus 25%. And I think the recent developments in terms of how we went through the crisis, how we went through stress test, how we build up reserves on the risk side, how we dealt with the specific issues of the pandemic are all points which I think give good support to our argument that we will continue with that and that we will stick to that. On the other hand, we also have to be cognizant and we have to be respectful towards ECB, which very clearly said, while lifting the restrictions, they also expect banks to stay cautious because they say they do not see the prices being over. They see that the risks have been reduced, but the crisis is not yet over and banks should stay watchful. So we will use the oncoming weeks and months to make a careful assessment of these 2 parts of the dividend assessment or dividend -- future forthcoming dividend payment. And we'll discuss this, of course, with the ECB in due course. We will stay prudent in terms of the costs which we will take. And as we cannot say much anyway because before the 30th September, until such time the original ECB recommendation or restriction speak about. We'll focus on a communication early fourth quarter to tell markets where we will land. That is as much as I can say. That's now -- I think you can do your reading from that. Now on the tax rate, that's more technical accounting issues. We did decide to look into the computation of the DTA. There are a couple of points which DTA suggest to the revision of that of the methodology, which we have maintained at here to now over the last 7, 8 years, which was, in some part, a little bit of crude and which basically led to the fact that DTA were increased and thereby also the after-tax income was increased and thereby the tax rate also had to be decreased in consequence. That is structurally, and that will continue also over the next periods to come without sort of making any major announcements or changes in terms of outlook, which we expect I think I mentioned and we also said in the press release that we would expect 20% for the entire year. And that is probably also in the vicinity in the range of things, which we would expect in 2022 to come. Let's see what finance says about that when we put together the plans and what the outcome will be. Now and on the run rate, simple answer is the forecast, which we have given -- the outlook which we have given on the basis of Q1, Q2 levels to be continued into the second half.

[Walter Allwicher, Managing Director of Communications]

We have further questions registered from Tobias Lukesch from Kepler and Mengxian Sun from Deutsche Bank. Tobias. go ahead.

[Tobias Lukesch, Equity Research Analyst]

Firstly, on the REF portfolio, it's a bit in the same direction like the NII run rate. I was just wondering if it's possible given the quite strong deal pipeline that you supposedly have and that we see the portfolio increasing considerably in Q3, i.e., potentially even adding on EUR 1 billion so coming closer to the kind of EUR 28 billion. Is that feasible already for Q3? And then I have to come back to the dividend. I understand that you're quite reluctant to be perceived as too bullish on that subject. However, I mean, if we look at your core Tier 1 ratio, which is actually kind of 87 basis points higher than the reported 15.4%, including all the interim profits. I was just wondering just paying the 2020 part, i.e., the EUR 40 million, which were restricted by the ECB earlier this year. Is that seen as or perceived as being too bullish, i.e., to stick to 75% payout ratio in 2020 while you not paid 2019 at all? I think, from a total perspective looking at European banks looking where you come out compared to big French and German banks in the bucket of 7% to 8% core Tier 1 ratio after the severe stress. I'm really wondering why you are so reluctant to, at least, signal the market that you will easily pay the 40 -- sorry, EUR 40 million in Q4, which is the remaining 2020 dividend. And that's -- it's very likely that you will stick to the 75% payout ratio for the coming years with a solid business outlook, which is in the range where you potentially are for 2021? So it's like to make a long question short, I mean, is EUR 40 million already a stretched amount? Or given that you have more or less accrued close to EUR 160 million? In my view, that is rather a low amount and one could even go up the ladder and even ask for a bit more in Q4 to come. Is that possible?

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

Now first of all, Lukesch, thank you for all the compliments which you are paying us. And I have a little reason to contradict with all the points which you raised according -- about capital quality and so on. I think the 87 bps on top of 15% is a bit on the high side, to be honest, because we have to discount for a couple of things there as well. But in principle, yes, the CET1 ratio, if we were sort of closing our books on the 30th June, at closing our year-end book would be shown a little bit higher. And I don't think it is too bullish and it is not prudent -- still prudent to come along to say we have a dividend policy, which is around 50% plus 25%. Given the circumstances, I would consider such a dividend as prudent. But I think you also have you have full understanding for the fact that this is a process over the next weeks to come, where we are in dialogue with the ECB as always, when it comes to dividend, and I don't want to preempt those discussions as a matter of courtesy and as a matter of sort of regulatory process, which we adhere to. I did like that may give you some indication, I did like the statement -- I think it was the BNP CFO, who said a week or 2 weeks ago, said I'm not in the business of capital accumulation, when he was asked what he's doing with this dividend. We are not in the business of capital accumulation, but we are in the business of staying prudent, both in terms of retaining good capital values, but also prudent in terms of dividend policy. So let's see. We think they're carrying on as they have progressed over the last weeks and months. Let's put it this way, we have not revoked our dividend policy, and that also by itself is an indication. Now on the Real Estate Finance portfolio on the deal pipeline, you mentioned what are the chance to have a considerable increase. I would agree to the extent that I would say I would expect a moderate increase by the end of the year as an indication to which direction we will go.

[Walter Allwicher, Managing Director of Communications]

Next question comes from Mengxian Sun from Deutsche Bank.

[Mengxian Sun, Research Analyst]

So 2 questions from my side. The first one is on the prepayment. So can you tell us how does the yield on the prepaid loan compared to the back book? And the second question is that, and I apologize, I have to touch on the dividend again, is that I was wondering why does pbb not make the decision before the fourth quarter as several other banks have already said that they are going to pay out a catch-up dividend in October? So I'm wondering what's the reason for that? Are there any uncertainties that I'm missing out there?

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

Now on dividend, to come back to that point. It's I think it's rather clear. ECB has sort of revoked its restriction on the basis and the assumption that no further, say, negative developments will occur up until the 30th September, up until such time the restriction is in place. And I think it is a good customer to be respectful of that time frame given by the ECB. We will adhere to that. There's no other no specific other reasons attached to it. And I think there's also no further need to precipitate things on that side. On prepayments. I have to ask you again because acoustically, I could not quite follow your question. Could you repeat your question, please?

[Mengxian Sun, Research Analyst]

Yes, of course. So there has been some prepayment or early prepayment of the loans happened in the first quarter and the second quarter. And this is the contribution of the results, the EUR 70 million in the second quarter and EUR 21 million in the first quarter. I was wondering how does the yield or the margin on these loans compared to your back book loan?

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

That is a good question. By tendency, the average margin, which is on the business, which did flow out is slightly above what we have on our back book margin.

[Walter Allwicher, Managing Director of Communications]

Thanks. And we have no further questions registered. [Operator Instructions] In the meantime, Philipp Häßler has registered a question. So the floor is yours, Philipp. Please go ahead.

[Philipp Häßler, Analyst]

Philipp Häßler From Pareto. I've only 1 question left. Your full year guidance pre-tax profit. Could you perhaps tell us what level of income from realizations you have taken into account for this for H2? I mean, it was very strong in H1. What do you expect for H2? That's basically the question.

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

That's relatively easy. We were conservative on third and fourth quarter in terms of forecasting. The figures which we have seen first and second quarter are almost twice as much as we would usually see with a given level of early prepayments. And therefore, we have taken down the level which we would expect in second half of 2021 significantly.

[Philipp Häßler, Analyst]

So significantly means normalized level like in last year?

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

Yes.

[Walter Allwicher, Managing Director of Communications]

So as we don't seem to have further questions registered, I would like to take the opportunity to once again thank you for your interest in pbb and for making yourself available for this call. For those of you we're still looking forward to their summer break, enjoy and for everybody else, just enjoy the summer. Take care, and we'll be back, at the latest, with our Q3 results. Thanks again. Take care. Bye.

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

Thank you.