Deutsche Pfandbriefbank AG

XETRA:PBB

Earnings Call Analysis

Q2 Results: Profit Growth Amid High Risk Costs

In the first half of 2024, PBB's pretax profit rose to EUR 47 million due to a 14% increase in net interest and commission income. Despite elevated risk provisions, which dropped nearly 50% from the second half of 2023, the bank maintained profitability. The REF portfolio was strategically decreased by EUR 1.1 billion, yet overall liquidity increased by EUR 1 billion, now totaling more than EUR 7 billion. PBB remains focused on selective new business with an annual target of EUR 6 billion. The bank's capital position is robust, with a 14% CET1 ratio and a favorable outlook for reducing risk provisions further in the second half of the year.

A Strong Start Amid Challenges

In its recent earnings call, Deutsche Pfandbriefbank AG (PBB) reported a pretax profit of EUR 47 million for the first half of 2024. This marks a notable achievement given the challenging market conditions, especially considering elevated risk costs that amounted to EUR 103 million. The bank's management emphasized that the profit is in line with expectations despite the backdrop of high provisioning needs, demonstrating their operational resilience.

Robust Operating Income Growth

Operating income showed a healthy increase of EUR 19 million or 7%, rising to EUR 278 million compared to the same period last year. The primary driver of this growth was a 14% increase in net interest and commission income, which reached EUR 249 million. This growth was supported by a portfolio expansion of EUR 1.1 billion in their real estate financing (REF) portfolio and continued discipline in maintaining solid margins.

Managing Costs and Investments

PBB has been able to slightly reduce general and administrative expenses and manage inflationary pressures effectively, maintaining stability in their operating cost structure. However, significant IT transition investments are expected to elevate the cost/income ratio from 45% to approximately 50% by year-end. The positive operating trends achieved so far have led to a substantial increase in pre-provision profit by 47% year-on-year, totaling EUR 150 million.

Risk Provisions and Loan Management

While risk provisions remain high, they are significantly lower compared to the peaks seen in the latter half of 2023. The bank's net position was positively influenced by active portfolio management, leading to a reduction in nonperforming loans (NPLs). However, the bank is continuing its selectivity in underwriting new business, aiming for a full year volume around EUR 6 billion, emphasizing margin improvement over volume.

Capital Position and Liquidity Strength

Deutsche Pfandbriefbank remains well-capitalized, with a pro forma Basel IV Common Equity Tier 1 (CET1) ratio at 17.2%, showing an improvement of 90 basis points quarter-on-quarter. The bank's effective balance sheet management has allowed it to mitigate a technical increase in risk-weighted assets (RWA) of EUR 3.6 billion by achieving a RWA reduction of EUR 1.5 billion in just one quarter.

Positive Outlook for Commercial Real Estate

Looking ahead, the management remains cautiously optimistic, expecting a gradual easing of risks in the U.S. market, with a potential stabilization in asset prices. With the European Central Bank signaling a turnaround in interest rates, PBB anticipates that commercial real estate transaction volumes might see a slight increase in the latter half of the year, contributing positively to their portfolio performance.

Strategic Enhancements for Future Growth

The bank is focused on optimizing its capital structure and actively managing the balance sheet. Plans are in place to diversify their commercial real estate platform into less capital-intensive businesses, aiming to use their deep market expertise and strong client relationships to offer additional services. This strategic update is expected to unfold further in detail at the upcoming Capital Markets Day.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the analyst call of Deutsche Pfandbriefbank AG. Let me now turn the floor over to your host, Kay Wolf.

[Kay Wolf, executive]

Thank you very much. Good morning, ladies and gentlemen. And I would like to welcome you to our today's analyst call. Thank you for joining. Our CFO, Marcus Schulte and I will give you a brief overview of our half year and second quarter results. We will then be happy to answer any questions you might have.

But before we dive into the numbers, please allow me to briefly reflect on my first six months at PBB. As you may recall, I gave you three reasons why I joined PBB when I took over as CEO in March. First, the bank's strong position as a senior lender in the commercial real estate financing market; second, PBB's impressive real estate expertise; and third, the opportunity to develop the bank strategically.

Today, a good five months later, I can say with deep conviction that none of the above fell short of my high expectations. For sure, I returned to PBB at a very difficult time, but I'm really impressed by the level of expertise, creative drive and work with which the team is meeting the challenges of the market. Clients appreciate this, too, as I have been told in many of my conversations. We will build up in this expertise in creative drive. We have an excellent foundation, and we will continue to develop the bank strategy. More on this later.

But first, let's look at our numbers. As predicted, the second quarter and the first half as a whole has been challenging, especially in the light of the fact that the market expectation on the turnaround in U.S. interest rates is still some way off. Consequently, risk provisioning remained high in the second quarter and now amounts to minus EUR 103 million for the first half of the year. Although this is already nearly 50% below the second half of 2023, it is still too high. Thanks to our very robust operating business, we were able to absorb this.

Pre-provision profit for the first half of 2024 is up 47% year-on-year and now at EUR 150 million. This is driven by an increase in our operating income, which is now at EUR 278 million supported by a 14% increase in NII. This leads to a pretax profit of EUR 47 million. We are in line with our forecast for the full year. CRE markets, though, have not yet found a turning point, but markets currently do [ Locarma ] and somewhat more stable, beginning to settle. With that, we continue to expect a further decline in risk provisioning in the second half of the year.

We continue to be very selective in our new business. For the full year, we expect a volume of around EUR 6 billion, including extensions of more than one year. We continue to focus on increasing margins instead of increasing volumes. At around 240 basis points, the margin is 40 basis points higher than in the first half of last year. As announced earlier, in June, we have now started the transition of our risk model approach to apply foundation internal ratings-based approach, FIRBA.

Until Basel IV finally comes into effect beginning of 2025, and regulatory approval is granted, we are calibrating our risk weights according to standardized parameters. Technically and temporarily, this increases our RWA by EUR 3.6 billion. Nevertheless, the bank has been able to maintain a CET1 ratio at its ambition level of 14% as forecasted in the 2023 annual results.

In the current market, this is a major achievement, and we worked hard to get there. Another piece of good news is that at the end of June, the pro forma Basel IV FIRBA ratio was at 17.2%. This is 90 basis points above what we saw in the first quarter. We successfully managed the technical increase in RWA through our portfolio transaction in May and our active capital and nonperforming loan management. We will elaborate on this later. Our liquidity position also developed very positively in the first half of the year. To date, we issued a total of around EUR 2 billion in fund prefer and have more than covered our planned funding needs for this year. Any new fund brief from here contributes to further prefunding 2025. We continue to have no need for senior unsecured issuances this year.

Ladies and gentlemen, we delivered what we promised. I will now hand over to my colleague, Marcus Schulte for further details.

[Marcus Schulte, executive]

Thanks, Kay. Good morning, and a warm welcome also from my side. Let me start with a look at some key figures for our half year financial performance on Slide 5. PBB generated a pretax profit of EUR 47 million in the first half of the year. It was again our operating resilience that enabled us to stay profitable despite elevated risk costs. Compared with the first half of 2023, operating income was up EUR 19 million to EUR 270 million. This in turn was driven by robust NII growth. Rather than focusing on additional volume, we are concentrating on new business margins, which we have again significantly improved by approximately 40 basis points to around 230 basis points compared with the same period last year.

the volume of the REF portfolio decreased slightly to EUR 29.8 billion in the first half of the year. This was due to portfolio sales and an active NPL management. In addition, we continue to be very selective in underwriting new business. This discipline also enables us to uphold our 14% CET1 management ambition despite the transitional calibration of risk weights according to standardized parameters. At the same time, we were further building out our comfortable liquidity position to above EUR 7 billion.

Let me turn to our key balance sheet figures on Page 6. EUR 1.9 billion, our new business volume was below previous year's level. Approximately 2/3 of this result from extensions of existing loans. January new business is, therefore, lower than last year. Hence, we are strongly focusing on the risk return profile and will continue to be selective. That said, we are in line with our forecast for the full year, where we expect a volume of around EUR 6 billion. With a slight reduction in our REF portfolio is mainly due to portfolio sales.

As part of our active balance sheet management, we sold a EUR 900 million REF portfolio in May with financings in the U.K. and the U.S. reducing our RWA by around EUR 700 million. By the end of the year, we expect our REF portfolio to increase slightly to around EUR 30 billion again, in line with our guidance. We are also making good progress in reducing our noncore portfolio, driven by active sales at attractive price levels. At the same time, we've been buying back some of the respective public sector covered bonds on the liability side.

Moving to the financial performance overview on Slide 7. Operating income rose EUR 19 million or 7% from EUR 259 million in the first half of 2023 to EUR 278 million in the first half of this year. This was mainly due to the 14% increase in net interest and commission income to EUR 249 million, benefiting from an average REF portfolio growth of EUR 1.1 billion and improved gross portfolio margin. Also, our operating cost strategy is intact. This allowed us to mitigate inflationary cost pressures and slightly reduce general and administrative expenses. However, the previously mentioned strategic and IT investments will affect the second half of the year.

As we conclude the switch of IT providers in H2, we will have to operate parallel IT landscapes temporarily before switching of the old at the end of the year. Therefore, we expect the cost/income ratio to rise temporarily from the current level of 45% to the guided level of around 50% at year-end. The positive operating trends year-to-date resulted in a EUR 48 million increase of pre-provision profit. However, risk costs at minus EUR 103 million remain elevated in the first half of 2024, as expected. That said, they are significantly lower than in the second half of '23 when risk costs started to increase. In effect, the overall profit before taxes of EUR 47 million reflects the challenging environment but is in line with expectations for the full year.

Going into the first deep dive on Slide 8. As mentioned, operating income is up EUR 19 million compared to H1 2023, driven by net interest and commission income, which was up EUR 31 million both on higher margin and average REF portfolio. On the back of margin discipline, Q2 net interest and commission income remained robust and was only very moderately down compared to Q1. Realization income, however, was EUR 11 million lower in Q2 and as a result, also in the first half of this year. The net position was driven by our active portfolio management including the REF portfolio transaction, sales in the noncore portfolio and liability management. Supported by a stable cost base and lower bank levies in the first half year pre-provision profit is up even more than operating income, i.e., EUR 48 million or 47%. This allowed us to absorb a continued high level of risk provisioning.

I'm on Slide 9 now. As expected, our risk costs were still on an elevated level in the first half of the year with risk provisions of minus EUR 103 million but significantly less than in the second half of 2023. Of that minus EUR 103 million, minus EUR 56 million were booked in Q2. Risk provisioning for Stages 1 and 2 amounted to minus EUR 3 million in the first half of the year, of which a positive EUR 7 million in Q2. These Stage 1 and 2 figures include the partial release of the management overlay for U.S. risk of EUR 22 million in H1. The are EUR 13 million in Q2. Stage 3 risk provisions increased to minus EUR 100 million in the first half of the year of minus EUR 63 million in Q2, again, predominantly related to office properties in the U.S. and development projects in Germany.

Slide 10 then shows the stock of loan loss allowances. The partial release of the U.S. management overlay and active NPL management resulted in a reduced stock of loss allowances in all stages on a quarter-on-quarter basis. The Stage 3 loan loss allowance reduction in Q2 was mainly driven by the sale of two U.K. shopping centers, which were sold with a consumption of EUR 79 million Stage 3 loan loss provisions. U.K. legacy shopping center NPL historically carry high loan loss allowances. The two remaining U.K. shopping center NPLs are covered by 58% or EUR 133 million Stage 3 LLP. Stage 3 loan loss allowances for U.S. risk experienced a moderate net increase of EUR 8 million to EUR 147 million, thanks to active NPL management there. I will come back to that. Further EUR 89 million Stage 3 LLP are now allocated to German development NPL moving up EUR 24 million from Q1.

Let's now take a look at our performing REF portfolio. I'm on Slide 12. The portfolio decreased to EUR 29 billion EAD. By the end of June, the reduction of EUR 1.1 billion in the U.S. portfolio had the largest impact and was driven by the portfolio transaction mentioned before. Despite the challenging market environment, our portfolio remains robust. This reflects our strong position as a senior lender. The average loan-to-value rose only slightly from 54% in the first quarter to 55% in the second. At around EUR 364 million, our exposure at risk was slightly lower than in the first quarter and is well manageable with the risk provisions we have set aside. The exposure at risk considering the amount at risk upon a further 30% devaluation on the basis of layered LTVs is covered by 41% through Stage 1 and 2 loan loss provisions.

Moving to NPL on Slide 13. As a result of our active NPL management, the NPL portfolio decreased slightly compared to the first quarter to EUR 1.58 billion. Hence, five NPL departures overcompensated four additions in the second quarter. The new additions with a volume of EUR 243 million related exclusively to U.S. office property loans. Works out or restructured loans with a volume of EUR 287 million related to three office, U.S. office properties and the two aforementioned financings in the U.K. NPL coverage is now at 24% via Stage 3 LLPs of EUR 386 million.

Next slide. We've been reducing risk in our U.S. performing portfolio. In Q2, we significantly reduced the portfolio by EUR 1.1 billion, which was primarily due to the portfolio transaction and repayments. We will continue to focus on risk mitigation. Our exposure at risk was down accordingly and now totals around EUR 131 million. It is covered by 77% through Stage 1 and 2 LLPs of EUR 101 million. In terms of risk mitigation, the main focus remains on our U.S. NPL portfolio.

We are moving to Slide 15, please. As expected, asset valuations there remain highly dynamic. As a result, the NPL portfolio in the U.S. increased by net EUR 80 million to EUR 706 million in the second quarter. The four new additions were not fully offset by the departure of the loans. The additions are largely offices in the West Coast and in Chicago with a total volume of EUR 243 million, departures are two loan repayments totaling EUR 117 million and a successfully restructured loan of EUR 45 million. The NPL departures were realized at book value.

The next slide is on our development portfolio. We continue to reduce our development portfolio in the first half of the year. At the end of the June, we stood at around EUR 2.5 billion, down EUR 500 million or 17% versus Q1. During this period, there was no new NPL additions in the development portfolio. From a risk perspective, as a senior lender, our development portfolio is well diversified with 56 projects from 35 developers with many years of experience in the market.

In terms of project progress, 2/3 of the projects are either in the land phase or in the completion phase. In all these stages, risk is naturally more limited. The remaining 1/3 consists of projects in the construction phase. Stage 3 loan loss provisions in the German development space continue to be almost entirely driven by the two existing NPLs in this construction segment. We expect construction risk to further reduce by 50% until year-end due to building progress and shift into the finishing phase or to investment loans.

Let's now take a look at the German book on Slide 17, which is highly diversified and regionally and property type diversified with a focus on five cities and characterized by continued lower LTVs of 53%. More than 50% of the portfolio has been revalued by external appraisers in the last 12 months with an average change in values of minus 12%. Exposure at risk remained moderate at around EUR 176 million or just 1.5% of the portfolio. With the exception of project financing, we currently have no NPL in Germany.

Let me now turn to the bank's liability slide on Slide 19. We were able to increase our already strong liquidity position by around EUR 1 billion to more than EUR 7 billion. This puts us well ahead of regulatory liquidity requirements and we have already more than covered our funding needs for the year. This includes senior unsecured where we continue to expect no issuance in 2024.

Next slide, please. Our capital market is focused on fund brief for which we can show a strong development. After EUR 1.2 billion issued in the first half of the year, we already added another EUR 800 million in Q3 so far. With EUR 2 billion across benchmark, [ taps ] and private placements, we are well ahead of our 2024 funding needs, i.e., all further fund prefunding is prefunding for next year.

Next slide, please. As reported on the Q1 saw, we saw exceptional growth during Q2, well exceeding our planned needs for deposits. Retail deposits peaked at EUR 8.1 billion. We are now a little lower at around EUR 8 billion. Given our strong liquidity position and reduced balance sheet needs, we aim to reduce retail deposits moderately to around EUR 7.5 billion by the end of the year. Looking ahead, we can optimize our refunding refinancing in view of our comfortable liquidity.

Moving to Slide 22. Due to prefunding and our strong liquidity position, we did not need to fund in capital markets during the volatile period in February and March. Meanwhile, foundry spreads have well tightened to pre volatility levels which allowed us to accelerate our funding activities in Q2 and Q3 at manageable costs. After EUR 800 million in Q1 pre volatility and EUR 400 million in Q2 after volatility, we were now issuing EUR 800 million in Q3 at moderate spreads. Furthermore, we actively manage retail deposits in line with our needs, adapting our conditions accordingly. While seeing a strong inflow in Q1 and Q2, we have reduced rates by 100 basis points in May in two steps. Thus, we now generate retail deposits at or below swap rates i.e., at attractive pricing.

And with that, I hand over back to you, Kay.

[Kay Wolf, executive]

Thank you, Marcus. And let's turn to capital on Slide 24. To put it short, we delivered what we guided. I already elaborated on this at the beginning of today's call. We successfully managed the technical uplift of RWA of around EUR 3.6 billion, and we guided EUR 3 billion to EUR 4 billion through our portfolio transaction and our active nonperforming loan management. And we continue to optimize our capital structure through active balance sheet management. With that, we have been able to partly compensate the technical uplift. The RWA reduction of EUR 1.5 billion quarter-on-quarter. Consequently, we remain well capitalized and well above regulatory requirements. As said, by the end of June, the pro forma Basel IV FIRBA ratio was at 17.2%, 90 basis points up compared to the first quarter.

And this brings me to Slide 25. If we take a closer look at our balance sheet management, we continue to focus on three aspects. First, we actively manage our real estate finance portfolio through portfolio transactions such as the sale of a EUR 900 million portfolio of loans, of offices, residential and hotel properties in the U.S. and in the U.K. that we completed in May. At the same time, we also made good progress in actively managing our nonperforming loan cases.

Second, we are actively managing down the noncore portfolio in an accelerated manner. So in the first half of the year, we were able to sell EUR 600 million noncore portfolio assets. Now at the end of June, the noncore portfolio is down to EUR 11.2 billion, and we continue to work on further reductions.

And third, we are actively managing our asset liability profile. This especially includes liability buybacks, of which we have done EUR 700 million in the first half of 2024, more than twice the amount compared to the previous year period.

You heard us referring to our profitability a couple of times today, yet we do not want to be misunderstood. The bank is profitable, but it is not yet profitable enough. We are, therefore, fully focused on further improvements of our sustainable profitability. This requires short-term corrections but also strategic decisions. Short-term measures include, first and foremost, the active management of our entire balance sheet that we discussed in depth. At the same time, we are in the middle of the process of our strategy update.

Key focus is on broadening our revenue base by diversifying our successful commercial real estate platform into less capital intense businesses. We will have to use the bank's extense real estate expertise and our strong client relationships to offer additional services to our clients and the constantly evolving real estate capital market. We are making good progress in the strategy process, but I hope you will understand that we will not go into more detail today. We will present the results of this strategy update to you in detail at our Capital Markets Day on October 10.

Finally, a few words on the outlook the second half of the year. In June, the ECB initiated the turnaround on interest rates. The market expects that the U.S. Federal Reserve to also initiate a turnaround sooner rather than later, in view of a potentially accelerating economic downturn in the U.S. This should further support to calm real estate markets in Europe and the U.S. We expect transaction volume in the commercial real estate market to pick up again slightly in the second half of the year. This should contribute to a slow bottoming out of prices, which should generally be reflected in the bank's portfolio, which would gradually be expected -- reflected in the bank's portfolio. Against this background, we confirm our full year guidance.

I now come to the end. Please let me summarize briefly as follows. First, the bank remains profitable, thanks to its robust operating business. Second, we have a very resilient portfolio. In addition, we are well capitalized and have a strong liquidity position. And third, we are working on further developing our strategy in order to strengthen our profitability in the long term.

Thanks for your attention. Marcus and I are now looking forward to your questions.

[Operator]

[Operator Instructions] And the first question comes from Johannes Thormann, HSBC.

[Johannes Thormann, analyst]

I have some questions on my side. First of all, on your loan loss provisions, they actually went up in the second quarter versus Q1. And what drives or will it lead to a downward trend in Q3 and Q4 to make reaching your targets of at least or more than EUR 90 million pretax profitable possible? You said the German development in the building phase should move on and come into finishing. But even with the development and finishing what makes you confident that it can be sold and can be rented. Could you elaborate on this and also on the U.S. offices as New York may be stabilizing, but you got some hits from the West Coast and Chicago and there are other markets which are boring, if you could elaborate, first of all, on the loan loss provisioning outlook.

Secondly, I'm a bit surprised that the cut in customer rates had nearly no impact on your retail funding. Could you elaborate a bit on this and what you have planned to get down to EUR 7.5 billion. Do you do additional cuts? Or what is -- is this to get this to a more normal level? And last but not least, on the capital side, we just ended at 14%. So the minimum of your target range, there is no room for any surprises. How can you make sure that you don't move below the 14% in the next quarter?

[Kay Wolf, executive]

I would take the first one and the third one, and I will hand over for the funding side to Marcus to answer on that. Your first question where on the LLP trajectory. And you are totally right, when you look at Q1 and Q2 numbers, we have a higher Stage 3 CLP in the second quarter compared to the first quarter. However, you are interested into the outlook and what makes us confident that in the second half, in particular in the U.S., we see a further easing in reduction of the overall CLP line and also with regard to the development side.

And the answer on that is starting on the U.S. side, we, first of all, have derisked our U.S. book quite substantially. We have reduced the performing book by more than EUR 1.1 billion so we have taken care that going forward, our book is much lower. And when you look at our Stage 1, Stage 2 CLP, we have retained a very high level of now EUR 101 million. And when we look through the individual transactions, back at the end of the year, we booked an overlay because we expected downward pressure on the U.S. side. Unfortunately, and in particular, given that the interest rate environment has not been turning as quickly as some have expected half a year ago, a lot of our expected downward pressure has materialized.

So hence, the second part of the answer, besides a lower book overall is that what we have expected, in particular in the first half has been materialized. When we look forward into the third quarter and fourth quarter, we still see some downward pressure, but at a much smaller amount compared to where we have been by the end of last year. So therefore, we are optimistic as we have seen in the first half, it develops as we have expected that CLPs are going to come down.

Let me quickly highlight on the development book. First of all, let's stress that despite quite a substantial amount of developers, in particular, in the last quarter, filing for insolvency, none of those has affected our portfolio. We have no additional NPL in that book. That is a testament of what Marcus said around the solidity of the development book. Nevertheless, we have two transactions that we have been working on, in particular, on the first half to stabilize and mitigate further downward pressure on the [ development ] those are larger ones in the building phase. And we have currently a good site on the development of those projects both one of which is fully now back on track in terms of construction. The other one, we are in very good engagement with potential investors to get this project back on track.

We have taken downside views on those projects. We have reflected that in the CLP, hence, the additional CLP. And also based on that stable developer portfolio, no additional NPLs and those two projects covered in the first and the second quarter we remain optimistic that going forward, the trajectory comes to a lower CLP. That, by the way, is well in line with our expectation. When you look at the second half of '23, we have already halved our overall CLP requirement, and we see that trajectory also going into the second half.

Let me take capital at your question. And first of all, let me reiterate that mitigating a technical and what we say also temporary up shift of EUR 3.6 billion by a EUR 1.5 billion reduction just alone in one quarter shows how capable and able we are to manage our capital position on balance sheet. And we have worked very hard to get there. You are totally right. We have achieved the 14%. With regard to volatility on that number, though, we would like to stress that we are now at standardized parameters. So going forward, the volatility compared to foundation or advanced IRBA approaches is much less.

And secondly, of course, we manage that capital position for the rest of the year across the book very tightly and have -- whenever there should be further downward pressure measures at our hand, to mitigate those. So we remain very confident that the second quarter capital ratio is a low point in the trajectory for the year 2024 and hence, our outlook into 2025, where we go into the new Basel regime on foundation approach, which shows us as of today, a very comfortable 17.2% capital ratio.

On that, Marcus, I would hand over for funding.

[Marcus Schulte, executive]

On your question on retail funding, you remember, obviously, that the reaction that we got on increases in the spring was really strong. And you see that in the chart. And obviously, it was too much for our needs. So we are now much more in an optimization of funding cost approach also for the benefit of NII and can afford to do so. So as you may remember, we lowered our external rate to customers in two steps of 50 basis points by 100 basis points. And if you look at the kind of league tables, we are, I think, rather defensive in our levels in the lower part of the league tables.

That said, actually, the rate of prolongation remains above our models, i.e., despite the fact that we post defensive external levels at very cost attractive in some cases, deeply [ EURIBOR ] margins. The book is reasonably sticky and above our prolongation assumptions in the models and therefore, we will see what the market does. Right now, there is no further decreases of external rates planned, but we will adjust accordingly to what competition does so that we kind of get to what we really need, which is the EUR 7.5 billion that I mentioned. So I think from an NII perspective, that is a positive because we can afford to be efficient on the external rates also forward from here.

[Operator]

The next question comes from Jochen Schmitt, Metzler.

[Jochen Schmitt, analyst]

I have one question, please. On your U.S. nonperforming loans. Do you see the risk that your NPL portfolio in the U.S. might include some individual assets for which there might be still the risk of a further significant impairment of the asset value in your LTV calculation, for example, due to a very high vacancy or major modernization needs.

[Kay Wolf, executive]

I take that. The short answer would be, if we would see that, we would have to book it. So hence, from that side, the short answer is no. The longer answer would be, of course, according to IFRS 9 regulation. The way we take the impairments is always looking in different scenarios. And there are scenarios included that is a base case scenario, but there are also scenarios included that reflect downsides potentially coming to those properties. So hence, there is a reflection of further downside on those assets in the current calculation of our loan loss provisioning.

But however, it's fair to say, we don't have the crystal ball going forward. We are monitoring each of those transactions very closely. We are working very closely in the bank consortia or individually with the clients to get them worked out, get them worked through. As you can see, in the second quarter, we have been successfully in a very difficult market to find solutions, either repayments or restructurings. So therefore, we are very close to that book and have a good sight in terms of what's going to potentially can happen to the existing NPLs.

[Operator]

[Operator Instructions]

[Kay Wolf, executive]

The stuff seems to be the case. I think we waited a bit to allow everybody to reflect if there is no additional question, then I would say we are closing today's call. Thanks very much for dialing in. Thanks for the questions. And of course, if there are further questions coming after the meeting, you feel free to reach out to our IR team, Michael Heuber, in particular, to get additional questions answered. Thanks very much, and we wish you a very good day.