Deutsche Pfandbriefbank AG

XETRA:PBB

Earnings Call Transcript 2022-Q2

[Unknown Executive]

Thank you, Nadia.

Ladies and gentlemen, welcome to the analyst briefing call of pbb Deutsche Pfandbriefbank on our second quarter and half year results. My name is Bjoern-Jakob Treutler at pbb, I am responsible for Treasury, and I have the pleasure of hosting this call on behalf of Communications alongside our CEO, Andreas Arndt today. You should all have received an e-mail with the press releases and the link to the analyst presentation, which is available on our website. Andreas Arndt will run you through the main developments and results, and after that, analysts will have the opportunity to ask questions.

So without further ado, I now hand over to our CEO, Andreas Arndt. Andreas, please.

[Andreas Arndt, executive]

Thank you. Welcome to pbb's analyst call regarding second quarter and half year results for 2022.

Before I embark on today's agenda, let me make a few remarks sort of outside the agenda. You know that Walter Allwicher was our Head of Communications and Investor Relations. And as such, together with Michael Heuber, our new Principal Partner and Point Person in pbb, has left the bank effective of end of June this year. I'm very grateful for his first last work and his dedication to pbb's cause for more than a decade, and again and again, turbulent times. We wish him all the best.

At the same time, I'm very proud and I'm very pleased to be happy to welcome [indiscernible] as our new Head of Communications and Investor Relations. She is presently Head of Communications and Public Affairs at HSBC Trinkaus & Burkhardt, will take over new responsibilities first of November, i.e., she would have a swift onboarding for the presentation of third quarter results. She brings on board an impressive career and impressive experience, stretching from working with the Financial Times, Management Magazine and [indiscernible] from Corporation Communications of Deutsche [indiscernible] in Europe. And as mentioned, from HSBC Germany, with a broad and wide experience in communicating banking issues across the entire business and internationally. We're very happy that we were able to convince her to join pbb.

While she's preparing herself, Bjoern Treutler, who you just heard, our Head of Treasury, kindly agreed to shoulder additional responsibilities, and thus, is Communications and Investor Relations in the meantime until [indiscernible] is on board. Many thanks to him. He has clearly chosen an interesting time to augment his working experience.

Now with that, let me turn to the real reason why we are here today, why we have this call, and that is half year figures for pbb. The second quarter 2022, which we are reporting on, is also the second quarter of the ongoing devastating war against the Ukraine, with significant economic impact while corona is presently drifting out of focus. pbb continued to prove robust with PBT of 65% against 62% last year at the same time, which is 5% up, and EUR 107 million on half year, which compares against EUR 114 million for the same time the -- for the last year, a figure which was supported by significantly high pre-payment fees.

Lending business provided again a solid performance. Its main long-term income constituents remained relatively stable. Risk-wise, we have no major accidents and no new accidents to report, and the cost we kept under control. All in all, I think a solid result, even though the economic and political conditions have worsened further. The Ukraine country continues unabated. Energy supply and energy prices remain precarious. GDP forecast being adjusted and revised downwards. Inflationary pressure remains. Interest rates have risen and commercial estate investment volumes have declined in Q2, and expected to decline further.

Despite these developments, our earnings and risk conservative business model had proven to be robust and stable. We are prepared for the increasingly difficult markets thanks to our credit standard's high leverage of provisions by maintaining the management overlay and our stable capital base, which has, as we mentioned and pointed out to you many times, which has been calibrated to the expected [ paid for ] levels. Therefore, in a nutshell, we stick to our full year PBT guidance of EUR 200 million to EUR 220 million. However, realistically, we also have to acknowledge the market's movements on the commercial real estate side, and we expect the new business to be and to land at the lower end of our guidance, which was set at EUR 9.5 million to EUR 10.5 billion.

With that, let me turn to Page 4, Slide #4, which is the highlights with some more figures attached to it. The highlights for Q2 and first half. NII kept relatively stable with EUR 120 million in the second quarter against EUR 122 million the quarter before. While the average real estate finance volume has increased and the net portfolio margin also did show some upticks, which compensated for the loss in revenues from floor income, which evaporated due to the significantly increased interest rate levels and [ did it ] that rate much faster than we did expect.

Effects of the rise of interest rates, the strong increase in interest rates were also affected in the realization results. In view of the high degree of general economic uncertainty and significantly higher refinancing costs, real estate investors increasingly are more reluctant to repay loans early. After the exceptionally high income in the previous year, the realization results or the prepayment results stay on low levels, with EUR 5 million in the actual quarter and EUR 10 million for the half year, which is significantly below the last year's figures which stood at EUR 38 million for the half year. That is not exactly helpful for the period income, but it is also good. That needs to be mentioned, good for the portfolio growth and the long-term interest income.

Operating income was thus slightly lower than previous year, EUR 272 million compared to EUR 287 million from last year. General admin expenses were kept stable quarter-over-quarter with EUR 53 million, and is slightly up year-over-year. It mainly reflects higher project costs, such as for regulatory topics and strategic issues and projects, which includes digitalization and ESG, something which I will comment on further down the line. With that, the cost/income ratio stays at a low level of 42%.

As I said, no new accidents on the risk side. The net additions to provisions in the second quarter amounted to minus EUR 1 million, basically driven by Stage 1 and 2 model releases on one hand, which were fully compensated by increases in Stage 3. The scenario's assumptions, which we applied so far, have been aligned with current macroeconomic forecast, adequately taking into account also downside scenarios, or as we call it, the strongly adverse scenario, i.e., a recession as well as the oil and gas embargo with an unchanged high weighting of 40% when it comes to model calculations. At the same time, we keep our management overlay at EUR 42 million after EUR 44 million in the quarter before.

Despite increasing headwinds from decline in commercial real estate investment volumes, which we did observe in the second quarter '22, our new business and real estate finance reached a solid volume of EUR 2.2 billion, which is about 30% up from last year's figure, or if you do that calculation on a half year's basis, the volume is up by more than 10%, i.e., it's EUR 4.3 billion over EUR 3.8 billion last year. It goes without saying that we continue to put risk first, and that also shows in the average LTV, which continues to run at a 56% with the new business also in this quarter.

The average gross interest margin is back on the level which we did compute the year before, i.e., EUR 170 million after the lower figures of roughly 150 basis points, which was the result of a couple of larger, low leverage lending transactions in the first quarter. So significant uptick in the profitability of the business and the margin of the business in the second quarter.

New business pipeline for the third quarter still looks good despite the overall market trend. But we also have to acknowledge that uncertainties are further on the rise, and therefore, we expect the new business volume for the full year more likely at the lower end of our guidance, which we set at the beginning of this year at EUR 9.5 billion to EUR 10.5 billion.

It also should be noted that the portfolio growth is ahead of plan, quite significantly ahead of plan, which is good, with an increase of EUR 800 million year-to-date and EUR 1.6 billion year-over-year, amounting to EUR 28.4 billion as we speak as of 30th of June. And that should certainly also support the NII line in third and fourth quarter of this year and '23 to come. NPLs remain on low level, with an NPL ratio of 1.1%.

Now given the situation which we are in, it's, I think, due to remark that the exposure in Ukraine, Russian Belarus, as we have stated earlier on, is unchanged, and there is virtually no exposure in the area of commercial real estate filings. And we have no direct commitment and no lending against real estate properties located in these countries. In the area of public investment financing, a few loans with an indirect relationship and a low volume towards Russia, all 3 sufficiently covered by German ECA. The uncovered part amounts to approximately EUR 3 million, which was provided for at the Stage 3 loan loss reserve in Q1. There is no financing for persons who are on the sanctions list of the European Union. And indirect effects such as, for instance, a Russian company being a tenant in the Western real estate property which we finance, are basically marginal or not existent, and are being watched and monitored and closely monitored anyway.

The funding, I can say, the funding is in plan. We raised another EUR 1.4 billion in the second quarter, bringing the total new funding volume for the first half up to EUR 3.2 billion, which is 40% more than we contracted from markets or placed in markets last year at the same time. And the average funding spread is almost down by 1/3. To be honest, that's a figure before the market disruptions, which we have seen in July, but the overall tendency is good for the profit and loss of the bank.

Strong focus remains on Pfandbrief, on matching currencies and on green financing. And also, in the light of the development of senior unsecured funding spreads also on deposits, which have gained in terms of relative attractiveness again.

Capitalization stays strong at 17.1%. That's the same figure which we also did show to you by the end of last year. And with all that in mind, pbb stays on track, and we stay on track in terms of our full year PBT guidance of EUR 200 million to EUR 220 million, which we decided to leave it unchanged for the time being. However, and that's also a matter of course, if things should worsen significantly if, market disruptions should increase, that would certainly require new assessment.

As far as ESG is concerned, I will give you further details later on.

With that, let me turn to Page 7, Slide 7, which gives a bit of a market overview on commercial real estate markets. And Page 8, which is the overview on the overall economic and commercial real estate challenges.

Now starting with Slide 7. The current geopolitical uncertainties and macroeconomic headwinds, combined with high inflation, higher interest rates, have certainly led to higher reluctance in the markets in Q2. We see a slowing investment volume growth in the United States, which was influenced by some extraordinary items there in the last quarters anyway, and we see a 20% decline in transaction volumes in Europe. But we also have to keep in mind, and you see that actually quite well from the chart, the investment going are still at historically high levels, and that has supported solidly good new business volume in Q2.

Performance indicators for Q2 and prime core properties remain largely okay. There are no disruptions, as far as you can see, no disruptions in rental markets on the country. The occupancy rates are still maintained at very high levels, and the yields stayed largely low as rents in the commercial real estate sector, usually inflation index, the supporting property values, and the pricing side of properties are with regard to that.

Nevertheless, overall, risk increases, transaction volumes are expected to go down further. And also, the gap between bond yields and real estate yields is expected to come down further, i.e., other asset classes than real estate will become more attractive and investments will be rediverted to other assets than real estate. And that, in consequence in our view and in the view of the market, will lead to adjustments of yields in most markets and for most of the property prices.

If that sounds to you like an increasing challenging market environment, you're probably right, and there will be more of that to come next quarters. But I should also mention in all fairness that we see some mitigating factors, which may soften somehow the impact of a significant downturn in real estate markets. First of all, what we observed is that there's still a large amount of liquidity in these markets and the markets at capital, which supports the ongoing investment in commercial real estate, and commercial real estate is still seen and increasingly seen again as safe haven. Real estate is and will remain in most of the portfolio as one of the core asset qualities and investment classes where people will go to invest in also in future.

But there will be some structural changes. Some of them you're well aware, driven by ESG or driven by -- being driven by online and things like that, but also some new emerging asset classes such as in a district, in a city quarters or care properties.

Markets, that's the other observation, to make the markets develop differently according to the regional specificities, which basically adds to the diversification of our business and adds to the opportunities which we have. There is, for instance, to be noted that London in comparison to, especially to the European markets, becomes more attractive because their yield changes or their yield increases were affected already in the last years since Brexit. And we would -- prices in London markets to be more stable than, for instance, in Western Europe at this point in time. Also, the other point, if you look at the other market to look at is the U.S. market which in terms of economic development, probably is ahead of the European markets. And therefore, in terms of different cyclicalities, also market which remains very interesting to us.

And the other point I should mention and point out is prime and core properties, which is our primary focus in business, are likely to benefit from flight to quality. And as I mentioned, lower prepayments, which go along with this kind of scenario, low prepayments will support the portfolio as more prolongations will do.

So to put it in a nutshell, yes, times will be more challenging going forward. But there are still, I believe, solid business opportunities for pbb.

The major challenges are quickly summarized. It's actually quite a long list, but concentrating on the most important side. We have seen that economic forecast is winding down, and we would expect further downside risks to be considered, i.e., persistent inflation, and the fact that I think we have realistically to reckon that gas supply will further being curtailed, combined with aggressive tightening of monetary policy if especially inflation scenarios carry on as we see it just now.

We believe that inflation is likely to stay for some time at record levels in Europe and the United States, driven by elevated energy and commodity prices as well as by increased service price inflation. Same goes for interest rates, which we believe are likely to stay high or to further increase after some adjustments over the last weeks. That's indicated by the Central Bank's actions, but it's even more clearly indicated by the development of our market rates, which increased between 150 to 250 basis points depending on maturity within less than 6 months which is a surge, which is an increase, which we have hardly seen any time before.

And the third factor in this list is the slowdown of economic growth. We have aligned our assumptions or scenario symptoms with ECB and Bundesbank, and we have added an adversely strong -- we call it a strongly adverse scenario, which basically reflects the after effects of a real recession and complete gas embargo. We'll come to that on Page 13.

For all that, and just to remind everybody, I think for all that, we are well prepared by the high-risk standards in underwriting which we apply, by the sound provisioning levels in place. The scenario assumptions will cover the current macroeconomic forecast as equally, taking into account the downside scenario which I just mentioned, which we call the adverse -- strongly adverse scenario. On top of that, management overlay covers potential inflation risk as well as geopolitical and macroeconomic uncertainties. And with that, the strongly calibrated capitalization, I think we have a number of risk buffers built in to counter the current adverse developments.

Commercial real estate markets, as I mentioned, investment activities declined in second quarter, with further declines to be expected in the second half of 2020 (sic) [ 2022 ]. But it should also be noted that safe haven assets, core and prime assets or markets are most likely less affected than the rest. For now, we observe property prices to look relatively stable. That's been taken on the back of a few representative transactions in the other segment of the market while the rest still goes relatively quiet. However, most recent observations show clearly that the markets are slowing down further in response to worsening economic outlook and rising interest rates, with yields trending upwards and prices taking the opposite direction.

To give you a feeling for the quantity of the momentum, markets would expect yield adjustments in the range of -- sorry, in the range of 50 to 75 basis points, given the yield of EUR 300 million to EUR 350 million on prime property that sort of equates to something like 15% to 25% decrease within the next 1 or 2 years. And also to stress that point again, of course, these movements, this yield and price movements will depend very much on the segment. The property is in, be it a prime or core or core plus location or a BOC location.

While we, I think, should safely assume that real estate generally is a decent inflation hedge, there will be price adjustments, not only because of the increase in interest as such, but interest increased as cost of debt from an investor's point of view sort of makes the investment relative or new investments less attractive, i.e., the cost of debt are higher than the property yield. You run into negative leverage, and that certainly doesn't stimulate investment behavior.

Now strong attention is on developments, which suffer from supply chain disruptions, rise in energy cost and scarcity of building materials, driving up construction cost as a whole and also driving up delays in construction. The key issue, which turned out to be the focal point over the last weeks and months, is actually skilled and shortage -- skilled labors -- labor, which becomes [ liable ]. On the price side for building materials, we could see and we could observe some relaxation recently. Prices have come down significantly, which makes it a bit more comfortable.

Now you find a summary on our views on developments on Page 9. I would just give you a few points how we see the further development of that business. And first of all, to make that point, development make up for 12% of our portfolio in terms of commitments and approximately 8.5% in terms of actual outstanding. Most is invested in office, 55%, and residential, 21%. And the vast majority of the business actually sits in Germany, with a small portion of 12% in France. The risk mitigating factors why we still believe that this is a good and attractive business to do is, by the way, how we focus on the relevant risk factors.

And then first of all, again and again experienced sponsors who have the capital and the experience to see through development also in difficult times. It is, again, a question of location and excellent infrastructure. And we certainly have sort of strengthened or sharpened our view on the levels of pre-lettings or presales on the level of equity injections ahead of the bank. And we also took note of -- not only took note of, but we took trouble in getting recourse elements into structures to hold sponsors and investors responsible for the development of the -- development of the development, so to speak.

The other point is important for the structure to have long stop dates, which leave sufficient room for potential construction delays. And the paramount issue in deciding whether to go along with such an investment or not is whether the investor has applied adequate risk and cost buffers in his calculations.

The other point is, apart from regional stretch and the property type, is what kind of phase in terms of development you're presently financing, and we distinguish between first phase, second phase, third phase. First being the land phase, second, the construction phase and the third one is the finishing phase. And it's somewhat obvious that the first and the third phase are the least riskiest development phases to look at. And it is also good to see that we are mostly invested in projects which are either in the first or the third phase, i.e., with a relatively low risk profile on our books, and that also translates into the fact that we have currently no default cases on the development portfolio.

With that, let me come to Page 11. Slide #11, which gives you the usual P&L overview, and I will just pick up on 2 lines before I go into more details on specific points of interest. Now, the net income from fair value measurement is EUR 5 million in Q2 and EUR 14 million for the half year, was mainly driven by credit spread and cross currency valuation effects. So the -- nothing really to write home about. And the same goes for net other operating income, which is an uneventful line, with presently EUR 4 million after some charges for FX negatively impacted by FX changes in the second quarter.

The details on NII development, you find on Page 12, on Slide #12. And as I already mentioned, underlying income from lending business remained solid with an average -- increased average real estate financing volume of EUR 28 billion -- average, by the way, EUR 28 billion at an increased net portfolio margin, which largely, and by and large, compensates for the further decrease in public sector portfolio where we lose NII and the loss in floor income due to increased interest rate levels. Thus, the NII remains relatively stable with EUR 120 million in second quarter against EUR 122 million in the first and EUR 242 million to be compared with EUR 246 million for half year last year.

The effect and the rise of interest rates were also reflected in realization results, which is basically prepayment fees. After exceptionally high income in the previous year towards EUR 5 million for the second quarter and another EUR 5 million for first mix, EUR 10 million in total, and that compares against EUR 38 million last year at the same time.

In view of the high degree of macroeconomic uncertainties, customers have generally hold on to their finances and repaid to a much lesser degree than before. Thus strengthened, as I mentioned, long-term earnings base, less prepayments, higher portfolio figures. But it certainly also means that we have less prepayment penalty fees in the realization result of the current period.

Now turning to Page 13, to risk provisioning. Risk provisioning was at minus EUR 1 million for the second quarter. The stage 1 and 2 model-based releases almost fully compensated for a further increase in Stage 3 for U.K. shopping centers. The net release of EUR 15 million in Stage 1 and 2 general loan loss provisions basically was prompted by the fact that the actually observed risk parameters turned out to be less than assumed at the beginning of the year. To give you an example, if the initial modeling or calibration of models was around, say, 10% inflation expected for the second quarter and the inflation turned out to be only 5%, then you have an overestimation in the model and then basically lower risk parameters coming in actually which, at the end of the day for that specific quarter, led to some releases. However, in view of further downside risk, we have adjusted model with parameters further downwards for the quarters to come in line with actual economic forecasts until '24, which we also anticipated model-wise.

We also take into account the further deterioration of economic forecast by incorporating a strongly adverse scenario. While our base scenarios, as I mentioned, takes into account current forecast from ECB and other institutions, which still assume, by the way, a positive economic growth, our adverse scenario reflects recession and gas supply freeze, and we have included this in the model calculations of Stage 1 and 2 provisions with a high 40% weight. In addition, also being mentioned, we kept the management overlay, i.e., the retention of value adjustments despite parameter improvements, at a stable EUR 42 million. This, by the way, corresponds to more than 20% of the Stage 1 and 2 provisions on balance sheet. So meaning, if you take EUR 380 million of the real estate finance adjusted figure, as you take the EUR 42 million, divide by that figure, you arrive at 20%.

We are thus also covering further reductions in forecast and the speculation scenario that we consider possible, i.e. the case of recession connection with the interest rate rise again, and -- yes, and full stop.

Stage 3, net addition to state amount in the second quarter, which is predominantly driven by EUR 22 million additions to the already-provisioned U.K. shopping centers due to further decreases in market values partially compensated by EUR 6 million release of an office building in Poland. I did report on that case before, you may remember that. After COVID-driven assumptions over the last 2 years, the decrease in market values, amongst other things, now reflects the assumptions of lower expected sales proceeds as a result of the current crisis, i.e., decreasing consumer sentiments changed interest rate level, which is relevant for valuation of the property and the further detrition of investor sentiment.

In that context, a quick look at the next page on the NPLs, which are slightly above -- not above, but slightly up to EUR 591 million, but still on a low level at 1.1% of our total portfolio. The increases out to the figure which I gave earlier on, with EUR 37 million on another ECA-covered loan, public sector loan, which was put into default.

The -- all in all, we retain or we maintain a solid stock of provisions on the balance sheet of EUR 380 million, which is slightly up from first quarter, and which is 25% higher than last year. The coverage ratio, therefore, is slightly up quarter-over-quarter at [ 120, 80 ] basis points, which is 20% more than last year.

The share of provisions in Stage 1 and 2 with no dividend default stays at approximately 50%, meaning that specific loan loss provisions and general loan loss provisions are basically half-half. Despite the conservative nature of risk provisioning and risk calibration, it also has to be admitted -- frankly admitted, that model assumptions in this unheard of and unprecedented combination of adverse circumstances represent an increasingly difficult business for which management overlays might be one remedy. But what is more important is the right positioning and the right selection of the business. A, like we do invest in core and prime segment business in core markets. B, do the same thing with good sponsors. Three, do it at conservative LTVs, and 4, adhere to strict and restrictive selection on strict covenants.

Now, operating costs and general admin expenses are -- quarter-over-quarter are stable at EUR 53 million, but slightly up year-over-year. Increase is mainly driven by higher cost for regulatory and strategic projects, including digitalization and industry projects. Personnel expenses were kept almost constant despite the usual wage drift at this time of the year. The average number of FTEs was almost unchanged. With that, the cost/income ratio is slightly up at 42%, at a good 42%.

The cost increase, which we show is to be equated to the investments in strategic projects, which we will continue even in difficult times. So the first one to mention in this line is new business usage rate for the client portal remains at something like 60% to 70%. The digital credit workplace further developed from design to implementation phase, and the ESG build-out continues as we have depicted it and have shown to you on our last presentation. i.e., we do report and we can report on a strong ESG progress, which has been positively acknowledged by the regulator.

We do report on the fact that ECB has confirmed our ESG risk governance being up to standards and being up to what they prescribe. And we do report on -- sorry, ECB stress test for physical climate risk, which we successfully passed with almost no additional requirements. And we can also report on progress, which is positively acknowledged by ESG rating agencies, with the recent upgrade from MSCI from A to AA.

With that, let's turn to Page 17 on the new business. As already mentioned, despite decline in commercial real estate investment volumes, so new business for real estate finance, again, reached a good level of EUR 2.2 billion, which is up by 30% against last year. Half year is EUR 4.3 billion, and that translates into 10% up against last year, average LTV at 56%. And interest gross margin, EUR 170 million against EUR 150 million the previous quarter.

The regional split is 46% in core markets such as -- not such as -- for the core market, Germany, versus a portfolio of 45%, so basically taking the same line. The strong U.S. business, to be noted with a 25% share in new business versus a portfolio 16%, and 10% in CEE versus a portfolio of 7%. What also is to be noted is that U.K., with 2% share in new business and the portfolio of 8%, certainly is punching below their weight, and that's something which is presently changing. We've seen more business coming through the pipeline in July, August, and there will be more business to come in the second half, and there's still some room to improve and to further this business.

By property types, we have predominantly engaged in offices with 51% of the portfolio, followed by strong logistics making up for 20% in terms of new business versus 12% of the portfolio and residential. That's a small share left over for some retail prolongations and mixed-use properties. Again, I mean, those and hotel business also, I think there was a small portion of that. Those are prolongations, extensions of current engagements, which we have.

As I said, by and large, retail is out of focus. We did the larger extension in July for factory outlets, which we found very attractive. So retail is still a territory where we treat with utmost care and cautiousness.

The third quarter pipeline looks good. However, new business volume for the full year likely more at the lower end of our guidance of EUR 9.5 billion to EUR 10.5 billion, as I just mentioned.

On green lending, we see some further progress which we made over second quarter. The green loan volume is further up by EUR 200 million and now amounts to more than EUR 1 billion. And just as a clarification, green loans require explicit green loan documentation. The volume of green loan eligible assets is significantly higher.

Now, I think I can skip Slide 19. If you have any questions on that later on, please come up with that.

And that brings me to Page 21, on funding. Funding is planned, with a focus of Pfandbrief asset matching currencies and green financing and deposits. In Q2, another EUR 750 million Pfandbrief benchmark plus EUR 50 million tap as well as the EUR 200 million Green Senior Preferred tap were the main stage of the day. On top, we had a couple of private placements, which brought us all in all to another EUR 1.4 billion in Q2 and the 3.2% total new funding volume for the second half -- for the first half. Pfandbrief funding was strong, accounting for almost 2/3 of the entire placements. Unsecured funding was strong as well with EUR 1.2 billion, almost fully in the Senior Preferred format with a high share of green funding.

Also to be noted, the average spread was down by also almost 30%. In July, we successfully issued another EUR 750 million mortgage Pfandbrief, with a still attractive spread of 6 basis points. Furthermore, and that should be mentioned, furthermore, the rising interest rates and volatility born markets make our PV direct retail cost base more attractive again. We increased volume by EUR 200 million to EUR 3.4 billion in Q2, and we aim to further increase the volume to counterbalance high unsecured capital market spreads and thus optimize our funding costs. We intend to further increase the volume at pbb direkt but will, however, benefit less from rising interest rates than, for instance, the positive financial institutions.

On the capital side, also things got rather uneventful. That's Page 24. We come in at 17.1%. The capital requirements basically remain unchanged, however, we also have to note new requirements by ECB by Bundesbank given the upcoming changes in the country-specific countercyclical buffers and German sector's systemic risk buffer, where we were calculating with the 45 basis points in the past and have to raise that and anticipate that, and the countercyclical buffer up to 75 basis points from '23 onwards.

Before I come to the summary, let us have a quick look at the strategic initiatives which are carrying on with add-on investments, with add-on cost. And as we presented to you last time, we differentiate in 3 categories. One is product differentiation, the second one is green and the third one is digitalization. In all 3 categories, we made progress. Product differentiation origination activity for offering new product lines is still at an early stage and needs to gain further traction, but I can say that all prerequisites are in place. We have, though, given, and that's owed to the actual economic situation, macroeconomic situation, have put non-senior on hold because of the market situation. That is, as we always said, the product if and when markets are on the rebound. But presently, markets still have some way to go for a rebound.

What is running according to plan is the build-out of the U.S. business, as I mentioned, with 25% share in new business. That translates into portfolio share up to -- up by 4%, i.e., 16% and then increase in terms of volume by EUR 1.2 billion. Low leverage lending remains core element in the current market situation, with 35% share in first half '22.

Green has become integral part of our loan origination, with previous expertise well acknowledged by our customers. Green loan volume now exceeds EUR 1 billion, which is further up another EUR 200 million.

And the third point, digitalization. The client portal is well accepted by our clients, as I said, with usage rates between 60% to 70%. That needs to stabilize further, but that also needs more clients which have been put through the system, and that's on a good path. Efficiency measures to cover the entire primary credit process, that goes without saying, are pushed forward constantly. You may have noted the press release which we gave out yesterday on our cooperation with SAP subsidiary, SAP Fioneer, where we co-construct a new product called the New Credit Workplace, and basically is core to the initiative which we have on the digitalization for the credit process of the bank.

Now coming to the summary. pbb, I think that's -- if you expect to summarize things, pbb remains solidly on track despite geopolitical and economic developments. Risk profile remains risk conservative. Provisioning models are aligned with the macroeconomic forecasts and assumptions, adequately taking into account downside scenarios with a 40% probability weighting on top management overlay, is kept in place to cover for potential saturation risks and the loan loss reserves were EUR 380 million or 120, 80 basis points is solid, and angle amply provided for pushing against the potential risks. Despite increasing headwinds with commercial real estate, investment volumes have declined and expected to decline further. On the other hand, real estate finance new business volumes remained solid, and the Q3 pipeline looks good. However, new business volume for the full year is likely to be at the lower end of EUR 9.5 billion to EUR 10.5 billion.

Prepayments will be significantly lower than expected, but support or the absence of prepayments to support the portfolio growth, and thus the NII line in the future funding, is well in plan. And the unchanged strong capitalization provides a solid risk buffer and put in [indiscernible] from competitive position.

With that, and all in all, taking all into account, we remain on track to confirm our full year PBT guidance of EUR 200 million to EUR 220 million, always subject to further market developments. If they should significantly worsen, we will have to reconsider guidance.

With that, I conclude my presentation, and I'm happy to take questions if you have. Thank you very much.

[Unknown Executive]

Thank you, Andreas, and thanks to all participants for listening. We now have the time to take analyst questions. [Operator Instructions]

We have the first question from Johannes Thormann from HSBC. Nadia, please?

[Johannes Thormann, analyst]

Two questions from my side.

First of all, on your early prepayment fees, you guided for a range of EUR 30 million to EUR 5 million to EUR 15 million for this year. Do you still believe in that guidance? Or would you update us on this one?

And secondly, on the new business, the margin jumped from Q1 to Q2, it's quite significantly. Can you give some more reasons why this margin jump so much? Different risk appetite, different business setup, please?

[Andreas Arndt, executive]

Johannes, thank you for your question. I mean, first of all, I would have expected some congratulations from your side on the new appointment, which we have, but I take that for granted.

Now on the prepayments, we said -- I just said, we have seen EUR 5 million per quarter in the first half year, and would expect the same run rate to come in for the second half. Is that guaranteed? No, but that's something which I would assume in my guidance.

On the margin side, I think it is less a question what the margins did in the second quarter than the question what the margins did in the first quarter. And we did explain that the decrease down to the EUR 150 million was basically due to the fact that we had a couple of large transactions, large low leverage lending transactions with very low margins attached against that. Best-in-class transactions, but they basically did reduce the average at that point in time.

If you want to put it this way, the EUR 170 million is more a mirror of, say, "more normalized picture for the business", with potentially also a slightly higher share of business on the development side, which usually carries higher margins. That would be my answer.

[Operator]

Okay. Thanks, Johannes Thormann. That concludes that question.

We have a further question from Tobias Lukesch, Kepler Cheuvreux.

[Tobias Lukesch, analyst]

Yes.

First, on the NII development. I was wondering on Q2, maybe could help us to dig into that again a bit? I mean, quarterly down, how much was the reduction here of this lower floor effect? What was the syndication effect? I mean, I guess that the U.S. dollar development should have broad tailwinds basically. And maybe you can also quickly touch on the interest expense? Potentially, I missed that in your earlier reference to prefunding. Maybe you can again elaborate on the prefunding level compared to last year, if this is much higher?

[Andreas Arndt, executive]

Yes, a fair point.

Now, syndication is no specific item, which is noteworthy in that context. What is certainly leaving its traces the interest impact on the floors. And that basically has been melting like snow under the sun in the first 2 quarters with a steep rise of interest rates, and we will see a further decrease in third and fourth quarter.

The good news in that is by then, because interests are definitely above the 0% line, the natural flows will be done with. But of course, we've seen the effect of that in the last 2 quarters. To give you a bit of a, say, indication of the severity of the impact, what we have seen as an increase in terms of NII contribution from new business or from increased stock and business or an increased portfolio has been eaten up by the decrease in floors, so that's a little bit sort of uphill battle on that side. But the good news of that is the negative effect will peter out while we still build our portfolio, and we'll see the positive effects of that in the coming quarters.

I think on the dollar side, on the foreign currency side, there's not much to report. More interesting point is, I would say, the structural changes in markets will affect the funding cost going forward. As I said, we are in the lucky situation that we are "dependent on Pfandbrief", and we have done a lot of Pfandbrief funding over the last quarters, giving us a very strong footing on that side.

Senior unsecured, though, you have seen the spread developments over the last weeks have become more demanding. More interesting, so to speak, which is one of the reasons why we did not go to market at that point in time, being prefunded -- sufficiently prefunded ourselves. I think I made that point also on the last presentation, we took travel to have a sort of long ahead funding level going forward through the summer break.

Nevertheless, we can also safely say that the funding levels for senior unsecured in the range of 40% to 45%, which we have contracted -- still contracted in the first quarter, is probably history, and we will have to cope with higher funding levels going forward. Now, that is partially counterbalanced by the fact that retail deposits become more attractive relative to our funding levels, which we see on senior unsecured side. So that then gives the effect. It's also, say, a relative effect because the total funding consists of factory plus senior unsecured plus deposits, and senior unsecured within the funding mix makes only some 30%, 33% of the total, so that's also a [ binding ] effect.

I think the natural conclusion in terms of keeping funding costs stable or making the changes more palatable to the bank is to increase the deposit volume, and that is exactly what we are striving for. We have to consider -- we have to also consider the fact that those are fixed term deposits which are priced closely to the market, so we should not expect the same level, the same gearing as a universal bank with large stock on site deposits from concurrent accounts may have, because that's basically price insensitive to market changes. But still, the relative delta to the senior unsecured mix fixed deposits as we do it with pbb direkt very much attractive. And therefore, we continue to build out that business.

So otherwise, you know rising interest to see -- should not affect the bank too much because we are basically positioned on a neutral basis against rising interest. If the 3 months, new rivalries rises in the market, it rises on the active side of the business, on the asset side of the business as much as it drives on the passive side, i.e., the liability side of the business.

So therefore, yes, there is something to observe. Yes, there is some structural changes, but nothing which should sort of seriously hamper us in doing new business.

[Tobias Lukesch, analyst]

Second one, maybe on NII. Looking at the gross margin development, and we guided that this is a bit under pressure or lowering. If we look at Q2 or in general, on the development, you can say the back book is down from 150 bps to 146. Kind of -- I was wondering, was Q1 also back-end loaded with that strong new business volume? Or is there really a bigger challenge, like about the 200 bps maturing or basically have runoff?

And secondly, on the TLTRO effect that will bite in Q3, I was wondering how you can offset that quarter-on-quarter kind of 9% NII impact going forward? What is your view on that? I mean, will it be compensated by a lot of new business or should we expect, yes, NII to go down significantly?

And then the last question with regards to the outlook, which was slightly revised down again basically to the year-end outlook you gave on NII, which is slightly down. What is the definition of slightly? I mean, is it a kind of 5%? Is that slightly for you?

[Andreas Arndt, executive]

Okay. I try to get this thing sorted out.

First of all, on the margins, I'm not 100% sure whether I got your point. The 150 basis points which we had last quarter, I think, were driven, and I think you made it...

[Tobias Lukesch, analyst]

So that is kind of my back book calculation I have on your NII divided by the average financing volume outstanding that you report per quarter basically. So if you do that where the TLTRO everything is included, kind of gather 250 basis points in Q1 and 146 in Q2.

And yes, the question is like, how you, at the end of the day, manage then the TLTRO impact in terms of how margins are developing?

[Andreas Arndt, executive]

Okay, so we'll take that into context.

Now first of all, over time, yes, we would expect a TLTRO effect or the lack of that effect to be compensated or overcompensated over the next quarters to come by new business, but also more imminently by the fact that the calculation of the funding cost per year, so -- and the rising interest will give us some positive effect on the cost of funding, which partially compensates for the lack of the TLTRO bonus which you were referring to.

So yes, we will see that in third quarter in a more pronounced way. We'll make good for that in fourth quarter and '23. The -- and that also sort of drives the outlook. I suppose you mean the outlook on NII rather than the outlook on PBT, correct?

[Tobias Lukesch, analyst]

That was slightly down NII outlook, which was basically in line with your Q4 presentation. I think you were a bit more optimistic in Q1 compared to 2.

[Andreas Arndt, executive]

No. I think that's pretty much unchanged. I mean, we have no reason to assume that we should give a more cautious outlook on NII than we gave on the first quarter. I would say on the contrary, because the portfolio growth actually is a bit stronger than expected, and that should help us.

[Tobias Lukesch, analyst]

Okay.

Maybe a last one on the mezzanine and the loan to loan business. I mean, has there been any sizable development? Or are you eyeing more to act on that kind of newly-approved asset class or type of loan? Or is that something where you do not expect significantly changes, i.e., also no real impact on new business LTVs, on the asset quality going forward.

[Andreas Arndt, executive]

Now as I said, on the non-senior part of the new product range, we always said we'd do that if market permits. I mean, market permits because they would take it, but the market is also much riskier than we anticipated a year ago. And therefore, we do have a number of proposals on our table, which we risk-wise would think, would deem to be feasible and doable.

However, we have not transacted a single one so far, and we keep it this way until the outlook of the market becomes much more solid. We need robust and uptaking markets for this kind of product. And otherwise, we stay put. That should not sort of influence our outlook for '23 too much because the amount of business which we calculated in or did include in our planning for '23, is rather small and I think can be compensated by other means.

So to put it this way, it remains in our weaponry, remains within our CapEx to be taken out when the market is given the opportunity to successfully place that product. But for the time being, the appetite is rather limited.

[Unknown Executive]

All right. Thank you, Tobias, for your questions.

At this point, we have no further questions. [Operator Instructions]

Well, thank you very much for your participation. We have no further questions, so we'll conclude this call. Thank you for joining.

[Andreas Arndt, executive]

Thank you very much, and have a good time. Stay healthy. Thank you.