Deutsche Pfandbriefbank AG

XETRA:PBB

Earnings Call Transcript 2021-Q3

[Michael Heuber]

Good morning, and a very warm welcome from Garching. Thank you very much for joining us today and on the occasion of our Q3 results. Here with me is Andreas Arndt, our CEO. Andreas will present the results, and of course, we'll be available for your questions after the presentation. Andreas, please go ahead.

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

Yes. Good morning. Welcome to pbb analyst call on third quarter and 9 months results for 2021. I think the headline is pbb remains well on track, on the successful track. New business volumes have recovered visibly from last year's levels, up by more than 30% year-over-year and is showing solid stable margins. Fourth quarter new business is likely to come in above our previous expectations. The PBT at EUR 72 million in Q3 brings the year-to-date 9 months figure to a strong EUR 186 million, which already reached -- reachers the lower end of our full year guidance, which we raised to EUR 180 million to EUR 220 million PBT back in July. A strong result altogether, that is based on an operating income which is 15% up against last year, supported by stable net interest income and significantly higher prepayment fees. And also supported by level of risk provisioning, which remains moderate with further provisioning in stages 1 and 2, as well as a further cautious buildup of further management overlays. With that Q3 ties in with previous quarters of this year and full year '21 is likely to exceed the levels of 2020 and goes back to the successful 2020 year. Keeping in mind -- 2019, sorry, keeping in mind that 2020 results were comparably strong given the pandemic challenges of that year. However, as usual, and as you would expect us to be, we remain cautious on further developments given the most recent strong wide infection rates. But -- and that's also to say that also, we acknowledge that overall economic development seems to have overcome the expected fallout of COVID-19 challenges, such as subsequent rise in insolvencies and unemployment rates. The present economic concerns of rising inflation and interest and supply chain worries will have repercussions on commercial real estate, but in our opinion, with limited or varying degree of impact. Increases in construction costs will certainly have some bearing on investment yields. But the yield gap between long-term fixed income and property plus roaming and still increasing capital surplus ensure, in our view, unabated demand with appetite for commercial real estate. Hence, and altogether, commercial real estate investment volumes recovered above precrisis levels in the U.S. and are trending solidly upwards also in Europe. So all in all, we remain quite optimistic to reach full year results at the upper end or even slightly above our guidance of EUR 180 million to EUR 220 million, while, at the same time, maintain solid buffers for potential delay to new rising impacts. Now having said that, turning to Slide #4, please. A quick tour through the highlights of third quarter. There, you find all what we need to tell. Those Q3 9 months results show a strong recovery from last year. Q3 is up 53% -- PBT is up 53% from EUR 47 million to EUR 72 million. And 9 months PBT is almost up by 79% from EUR 104 million to EUR 186 million. The good development basically is owed to a couple of factors, one of them we already mentioned, operating income which was up 15%, and that's been fed by a good NII development of plus 5% on that side, reflected in strong quarterly run rate of EUR 123 million on NII over the last 3 quarters. In addition, operating income was significantly supported by a further strong increase in prepayment fees, well above our expectations as it's going to be the main driver for realization income. And again, some EUR 17 million were accounted for in Q3 up at EUR 17 million in Q2 and EUR 21 million at the beginning of the year. So the 9-month figure adds up to EUR 55 million, which is significantly up from last year. Operating costs are kept under control, admin expenses are largely stable over the year and the year-over-year figure is slightly up as we did expect to the tune of EUR 151 million to EUR 145 million previously. Risk provisioning of minus 17 in Q3, stable at the moderate level, the 9-month figure of EUR 50 million is significantly down from last year's figures of EUR 84 million, while we build up further management overlay up to EUR 48.5 million with a EUR 10 million addition to that figure in the third quarter, which I think is justified in the view of the latest steep rise of COVID-19 infections these days. Now new business, I mentioned that at the beginning, comes in with good momentum, while we rigorously maintained selective approach. It's EUR 1.9 billion for the quarter, which brings the total volume up to EUR 5.7 billion for the first 3 quarters of this year. And that's at -- by largely stable conditions, LTV is at 55%, and the gross interest margin for the third quarter consecutive quarter is at 170 basis points. Real estate finance portfolio is slightly up at EUR 27.1 billion, reflecting the catch-up in volumes from the Q2 and with an overall stable development throughout the entire year. And that's noteworthy to remember, despite the fact that we had higher volumes of prepayments than last year, significantly higher volumes. The funding continues to run smooth over strong focus on foreign currency matching our asset side until October 4 fund raise issues were given to the market, plus furthermore to senior unsecured green bonds, I'll come back to that. And quite happy to mention that with strong placements also in Swedish krona complementing our currency mix. For 9 months, the market funding adds up to -- the new market funding ends up to EUR 3.4 billion, which is exactly the same figure which we had last year same time, but that's a good and nice and significant difference at our third lower strength. Capitalization remains strong. And to remind you, it's already paid for, calibrated CET1 ratio stands at 14.9%. Reason being, as always, when we show interim results, expected loss shortfall continues to be deducted from regulatory capital as the compensating balances from the new '21 risk provisions are not yet considered. But of course, will be also by year-end. Furthermore, 2020 profit after dividend and year-to-date profit '21 is not yet included. If you add up both effects, which we expect for the year-end to come, you're probably back to a CET ratio, which is in line with what we had in second quarter. Now this leads to the matter of dividends. As already communicated, beginning of October, the Management Supervisory Board of pbb wants to propose to the general meeting the further dividend payment of EUR 0.32. Together with the dividend payment, which we made already in May of EUR 0.26, you would have total dividend payment would amount to EUR 0.58. This corresponds with and is in line with our general dividend policy response with a payout of 75%, providing, I think, an attractive dividend yield of more than 6.5% based on year-end closing share price of 2020. Now the shareholder meeting will take place on the 10th of December and expectation would be that shareholders are not averse to increase the dividend. All in all, so that's what the page should tell you. pbb is well on track on all items and all issues even though remaining overall cautious and maintaining solid [indiscernible] suffers, we are optimistic to reach a full year result, which is at the upper end of our guidance or even slightly above that. Now the following page is #5, which is sort of one of material statements that I would skip it because most of the material has been commented and some others I will come back during the course of the presentation. Now the next part that is mine is markets that is on Slide #7. I should give you a bit of an insight as to how we look at markets effectively. The overall positive trend is further emerging with investment volumes continuing to recover back to pre-2020 or 2019 levels. But the development of the U.S. market, as you can see on this chart, is significantly more pronounced than in Europe as it always used to be with the United States quick down and quick up. We observed an ongoing strong differentiation between A, or prime properties, versus B or C properties or locations, as well as increasing differentiation between green and nongreen properties. We had no and we have no general downturn in prices. That's important to remember that, and there was so much discussion about how the year 2020 will reflect in property prices. We had no and we have no general downturn in prices on the contrary. What we have, what we observed is something which you may call split market with a strong performance and good transaction levels in the prime segment of the A segment of the market, while nonprime remains almost illiquid and shows no reference prices. Or if it shows -- that it shows prices which are significantly lower. Reason being, the ongoing structural shift summarized by home office online and reduced travels. And there's a fourth element which comes on top of it what I call the e-factor, brown buildings versus green. There's little appetite for brown buildings, which has the potential to become stranded assets. So while office and residential prices as long as being climbed, are holding up property values in hotel and we can remain stressed either in terms of price development for hotel sector, we believe it's starting to bottoming out with some consolidation trends and some structural changes, i.e., the transformation of property use into long-stay concepts and things like that, that's what we observe. Retail sector has and we've gone through that a couple of times with you and the picture is still the same. The retail sector has a differentiating landscape while retail parks have been recovered. Meanwhile, shopping centers show varied development with better performing when they are at inner city locations with daily supply capabilities versus those which have a problematic out-of-town situations or are very largely oriented towards special events and things like that. So by and large, office yields remain remarkably resilient, first of all. Solvencies are not kicking in as we did see it. Furthermore, so far, we only see a moderate increase in vacancy rates despite some structural consolidation for an increase in share of remote work. While in some cases, reduction of 30% in refi space are being announced, latest projections of future rented space showing a moderate reduction, something as we always discuss something about the -- around the 10% to 15%, which I could not dictated already a couple of quarters ago, which translate into a trend which will materialize only over time and slowly as rental agreements come up for renewal. And that's our firm belief this development will realize predominantly in the lower segment of the market, while prime properties are likely to hold up. Residential, there's not much to be said about that. It continues to be very stable. And logistics is stagnating on high price levels has been very much sold after very much in demand, slightly trending to overheat. And it's again important to remind everybody and remind ourselves not every shed and not every shack is a logistic center. So we need to be also very clear and focused on this segment, and it is also unclear how supply chain from sort of affect logistics. Developments, I had to come with delays in rising cost. Development that we closely observed but currently have no reason to be overly worried about. Why? Our regular assessment and valuation of property development always in that potential cost overrun or you may call it the cost reserve of 20% of the initial construction cost estimate, the safety margin, which seems to be prudent now and which we applied since long. So also for that reason, we presently have no single development case that we intend to share. So with that, let me turn to Page 9, which I give the usual treatment focusing or concentrating on some secondary lines while the larger items are being commented on the following pages. Three things I want to mention or want to highlight or to point out. First one is fair value measurement, heads accounting and other operating internal write-off and nonfinancial assets are all in line with expectations. No major movement there. The net income from fair value measurements is slightly positive at EUR 3 million up, which compares to minus EUR 12 million, which we had last year, reflecting the recovery of the COVID-19 related spread widening last year. We did already comment on that, and that was -- so that's showing the trend until today. Tax rate is at 15%, which benefits from change in accounting treatment of deferred taxes. And the last one I want to point out is we continue to show low cost-income ratio, which you can see on Page 9 here, with 38.9%, almost 40%. That's where it will be by year-end because we usually have an uptick in Q4 general admin and expenses. But I think it's still very competitive and very good figure to show. And also because of the developments are just depicted, ROE before tax is nicely up to almost 8%. Now that brings me into the more detailed section talking about NII and CI and talking about risk costs and the cost base. Now the income from lending business, as I said, remains on a strong level. You see that at the bottom left side of the page, was a steady EUR 123 million over the last 3 quarters, adding up to EUR 375 million for 9 months against EUR 356 million last year, which is a 5% uptick. Are we fine? Okay. So the benefit basically comes from a slight increase in average real estate financing volume which stands at EUR 27.1 billion against EUR 20.6 billion at the same time last year. And that's important at a stable average asset portfolio margin. Indeed, it's slightly trending upwards, while lower refunding costs improved net margins and not least supported by the TLTRO participation, which we extended into 2020 with some pickup in volume by, if I remember correctly, EUR 900 million. The floor income is still providing positive growth to the NII figure, albeit with diminishing speeds. And while our core commercial real estate portfolio delivers increasing NII contribution, there are some sort of ties running against some headwinds which are well-known, not at times commented about, and that's -- we have a lower return on the equity book, the liquidity book and the value portfolio. Now prepayment fees were well above expectations and continue to stay at elevated levels being the main driver for the increase in realization income. It was EUR 17 million after EUR 17 million in Q2 and EUR 21 million in Q1. And the total figure, as mentioned, adds up to EUR 55 million, which compares favorably against the EUR 20 million at the same time. The increase in prepayment volumes, however, was a matter of importance now. That was significantly less announced in the rising prepayment fees, which is good. Will that continue in '22? I believe, to some extent, yes, prepayments in this market reflect that investors in prime segment have experienced significant increases in asset prices for prime assets despite or perhaps because of the crisis. Given the structural challenges in commercial real estate in particular and the search for assets in general, prime properties will stay attractive, and that would be to be expected at least some trends in some ongoing development, which we believe the shift into continues into '22. We may take that also, by the way, as an evidence for the liquidity and the quality of our portfolio. Now coming to risk provisions. As already mentioned at the beginning, risk provision stayed on a moderate level with EUR 17 million for the quarter and EUR 50 million for the first 3 quarters together, which is significantly lower than the EUR 85 million, which we showed last time in the same time. The changes in stage 1 and 2 provisions with a net relief of EUR 1 million are mainly driven by some deteriorations of pbb-selected individual cases, plus stage 1 provisions for new business, of course, compensated again by some releases from parameters for a few deals such as on the LGD side, repayments and maturity effect. As infections have risen sharply over the last couple of days or weeks, we added another EUR 10 million to the management overlay, which now amounts to EUR 48 million, and that's providing a solid buffer for potential delays and newly arriving -- arising or new rising impacts. In other words, without management overlay, third quarter risk costs would have been EUR 7 million instead of EUR 17 million. Given the current rise in infections, we envisage to maintain that management overlay at least until year-end. Now the net additions to stage 3 amounts to EUR 18 million, which will be EUR 1 million on the positive side amount to EUR 17 million total for the entire quarter. And they basically stem from another EUR 11 million, which we sort of invested or spent on further adjustments to the U.K. shopping centers. We need to distinguish between part of the exposure, which is transactionable where we have seen sales where we were within our valuations. On one hand, there are larger shopping centers, which are Midtown, where we have no forms with and there are some shopping centers, which are peripheral and where further value development will depend on how the business shopping season will do. So I still believe we are on a conservative level in terms of provisioning there. But the party is not quite over. So the second point to comment on is a EUR 7 million addition as a transfer from stage 2 into stage 3 for an office park in Poland, which I believe is an interesting case because of the reason of default. The financing of that loan is up for extension -- for that property, is up for extension with a first-class tenant for us for significant ESG improvements or sustainability improvements for which the landlords, i.e., the investors tell the client does not want to pay a loan. As the loan matured while the rental contract was not extended, the loan went into contractual default and the market valuation was taken down significantly, hence the provision. The case shows how important environmental matters will be for future valuation matters. So the loan is current. The loan is being paid for net interest and so on has been paid for. The parties still negotiate. I don't think we will lose money. It's very unlikely, but it is interesting to see that tenants start to build up pressure for investors on their demand for sustainability, sustainability of the buildings that they want to have it. And here, you have an indication for what it is -- "what it is worth to be sustainable, to be green in terms of setting up your building. " All in all, by now, we maintained a significant stop of this provisions of EUR 320 million, which provides the coverage on our real estate finance portfolio of more than 100 basis points. of which approximately EUR 170 million or 60% account for general loan loss provisions in stage 1 and 2. And the coverage ratio of that is stable at 26%. So I think all in all, a pretty solid and straightforward picture there. Now turning to Page 12, operating costs, which I'll keep short. I think it's visible that we keep that well under control despite ongoing investments. The year-over-year figure is slightly up as we did expect I mentioned EUR 50 million -- EUR 151 million against EUR 145 million last year, mainly driven by nonpersonnel expenses, which were up by EUR 5 million, which again reflects the ongoing investment in strategic regulatory and ESG projects. However, personnel costs were up moderately by EUR 1 million, reflecting an FTE increase from 772 to 782 from regulatory needs and from methods or from measures of internalization of staff. While at the same time, wage split was completely -- is content. That is also important to recognize. Now cost income ratio as a percent is 39% at this point in time, and we would expect that to exceed 40% by the end of the year as the general admin expenses do pick up in the last quarter, we have seen that over the last couple of years. Now the write-down of nonfinancial assets remained stable, driven by scheduled depreciation. With all the investment we do, however, that's one of the points where we expect more depreciation to come over the next few years. Now turning to the new business, which is depicted on Page 14. All in all, I think it runs on solid track on a very selective basis. There's no change to our risk positioning in that respect. It's within our lines of business, volume-wise, margin-wise and risk-wise. New business volume is EUR 1.9 billion in Q3 with a total of EUR 5.7 billion million for the first 9 months, which is a significant recovery over last year, plus 33% according to my calculation. Average gross interest margin, as I said, at 170 basis points. And I just sort of make a call out behind that because that's a net figure that after FX pickup, which comes up with the U.S. lending which we have netted out. So we'll keep that on a comparable basis as well. Unchanged conservative position in terms of LTV, which we required from new business, which stands at 55%. And as we have reported before, no new commitments on hotel and retail shopping centers, except for some extensions, which we also booked. And that's on that side. So all in all, our positioning on the prime segment remains, in my view, remains without alternative. Given the structural changes, home office, travel, online shopping, rental relocations, certain property types in retail in itself, all properties with insufficient environmental transformation potential are to be avoided and will be avoided. The prime segment shows more stability of property values because of the better long-term perspective and the continued high liquidity in this segment, hence its transactional -- transaction ability. This view and this situation will be exacerbated. And I mentioned that by the advent of a new challenge, which is ESG, the dominant, the E of ESG. And as I said, stranded assets which are beyond reasonable economic repair and remedy have no liquid markets and will stay on the sidelines of markets and forecast and valuations and thereby on the sideline of demand. Just commenting on the regional focus, which remains in line with our strategy. In terms of regional state of business, the lion's share goes to Germany with 50% of new business and 46% for the portfolio. The France business is on 11 -- respectively, 12%, very stable. U.K., you can simply see the drift going down further with a 7% share in new business and 11% share in stock and in portfolio, which, as you may remember, 5 years ago was twice as much. The United States had picked up. You'll see that on the new business side with intensified sales activity on the U.S. markets were 15% of our new business which by now has increased the share in portfolio to 12%, which is similar to what we had in the old in France. In terms of property types, focus remains unchanged. Office is 50% after 66% on the portfolio side. Residential still goes strong, retail diminishing. Logistics was 18% in new business and 13% in stock, reflects the fact that we'll have a strong footing there, but the picture which we had at the beginning of the year were, I think, if I remember correctly, we had about 30% of new business production in logistics. That's been calibrated down and will be further calibrated down by the end of the year. Deal pipeline remains good, supporting new business volume for Q4 at a stable margin again. So the full year volume, we expect at the upper end of our guidance, which we -- if I remember correctly said at EUR 7 billion to EUR 8 billion. The portfolio quality, portfolio profile on Page 16, the message is, it is what it is, space on the conservative side of the spectrum, not much of a change. And the same goes for the NPL side, although slightly up from EUR 546 million to EUR 590 million. NPL ratio stays at 1%, and that comes from the ready project in Polish investment, the office part in Russia, where we have the situation that just expected landlord or investor and tenant struggle about who pays for sustainability investments and it's interesting to see. I repeat myself on that point, but it's interesting to see how the tenants and their guidelines on green policies on environmental issues, increasingly determines the agenda. And if you want to put it this way, the valuation change is the cost of ESG noncompliance. That's a matter which we will find more often in the future. And again, if I may add to that is one of the reasons why we need to be on the prime segment, why we need to be behind this method. Now funding has already announced was, I think, a complete success for 2021. We are ending up with EUR 3.4 billion by end of September. That is exactly the same figure which we did show last year. The mix difference being that spreads are trending 1/3 downwards. We had solid Pfrandbrief funding with focus on foreign currency. We had a 750 million benchmark club, so to speak, on the U.S. dollar side. We did 500 on pounds -- on pound sterling and 500 on Pfrandbrief, and we had a significant amount of private placements and a significant amount of Swedish krona funding on that side. EUR 500 million overall Green Senior Preferred Benchmark in January was followed by equally successful second EUR 500 million Green Senior Preferred Benchmark in October. With the two green benchmarks, pbb is one of the most active financial issuers in Green Senior. That's according to my calculation, 75% of senior unsecured and 30% of all new issuances are now being delivered as green bonds by pbb and the USD 750 million Pfrandbrief, which was issued in October makes us the largest issuer of covered bond for this year in the markets. Spending spreads, as I said, are significantly down and helping the overall average funding costs going forward. Let me turn to Page 20, which shows also the spread development. I think that's just to underline, underpin what I just said. And that brings me to Page 22 on the capital side, EUR 14.9 million is the figure by end of September. As I mentioned, with the circumstances that we do not account for interim results, and we do not account for compensating measures on expected shortfall. Those are things which will come in by the end of the year. Now we're turning sort of to the final look or final round of the presentation on strategic initiatives, on the outlook for fourth quarter and looking a little bit further. Strategic initiatives are progressing in line with plan. Digitalization, we continue -- we had it a couple of times before. We continue to extend our client portal and keep focus on client interfaces and client processes by year-end, and we will be ready to onboard all new client business and a large extent of the existing business with more to come in 2020. Furthermore, ESG has become a major dimension within pbb. We set up a comprehensive -- a very comprehensive, I must say, ESG program covering all ESG dimensions, i.e., the E and the S and the G, we defined a new ESG strategy. We look at the ESG risk hand-in-hand with what pbb is planning to do with us and the rest of the market in terms of ESG stress test, where I think we're going to be well-prepared for. In terms -- we look into data management, which is another challenge because it basically concerns data, which are more on the construction on the environmental side rather than being financial data, which we usually collect and of course, on our communication and disclosure issues. So the whole thing being surrounded by sales governance structure, which involves board responsibility. But that's the, say, the formal part of it, the more material part is how do we turn sustainable finance into business? How do we include that business, that ESG business into the overall pbb services. As I said already, since 2020, we collect comprehensive data on ESG criteria for properties, which are financed by pbb. On this basis, we established a green bond framework already in 2020 and now which we successfully issued 2 unsecured green bonds in 2021, which we just discussed one in January and one in October. We estimate that the green -- the green premium in the range of 3 to 5 basis points. And what is even more important and relevant to that particular aspect, we have reached out to a broader audience to a broader range of investors, which are specifically and particularly interested in ESG-based bonds. Also in October, we launched our green loan as a new credit product being those advantaged for properties which will build strict green criteria for investments as well as modernization of property. With that, we want actively to contribute to a more efficient climate standards in the real estate sector and the overall economy as well as that we reach out for the [indiscernible] as well as the EU climate goals. So the summary on the third quarter is we are well on track. I think we are well on a successful track. The operating performance was strong with new business at solid levels and stable margins and a stable real estate finance portfolio despite higher prepayments. We still hope for some and look forward to some portfolio increase in last quarter. Income from lending business remains on high levels, supported by elevated levels from prepayment fees, and the ongoing provisioning levels also remain moderate with NPL staying on the low level and LLP reserves being more than ample and compensation as shown demonstrated remains strong. What does it mean for Q4 and full year results, even though we cannot exclude any delays and maybe even newly rising impact from Q4 and pandemic rebounds? We are quite optimistic to reach full year but at the upper end or even slightly above our guidance of EUR 180 million to EUR 220 million. This will be based on the continued stable income from lending business supported by prepayment fees also in Q4. As usual, and as already mentioned, some increased costs in Q4 as well and a moderate level in risk provisioning. So all in all, we look optimistically not only towards year-end, but also optimistically into '22 because we think that, by the way, we have chosen our positioning, we are right there where we need to be for the markets to come. Concrete guidance where we provided as we share the full year results computation on the 9th of March. So with that, I conclude my presentation. I thank you for your patience and your attention, and thank you very much. Looking forward to have your questions and have a good discussion. Thank you.

[Walter Allwicher, Managing Director of Communications]

Thank you, Andreas. And it's time for Q&A now. [Operator Instructions] And the first set of question comes from Tobias Lukesch. Tobias, please go ahead.

[Tobias Lukesch, Equity Research Analyst]

I think I've never heard such an optimistic outlook into the next year, so this is a very confirming actually. Three questions on my side. So I think the elephant in the room is still the kind of excess capital of more than EUR 0.5 billion you have. And you just mentioned a very good outlook with regards to prepayment, with regards to the top line development in general. How would you think or how do you plan to use that going forward? I mean the book has been kind of flattish for many years now. We are at EUR 27 billion for the REF portfolio. Is there a chance that you grow that book further, not only in Q4, but let's say, in '22, '23? Is it possible to add another EUR 1 billion, EUR 2 billion, EUR 3 billion EV? I mean, thinking of, let's say, EUR 1 billion takes you EUR 75 million in capital and would generate at least EUR 17 million per annum, so this could offset TLTRO in the future, this could offset the prepayments. So the message would be clear that the top line is more than solid going forward. I'm not asking here for capital distribution, right, but just some usage of that funds. Maybe you can share a bit of the -- still like the concerns you may have despite the great reserves you have against the portfolio and so on? And secondly, to touch on that very similar issue on the NPL portfolio, you just mentioned the add-ons on Poland do not really pose a significant risk on the one hand. And secondly, you talked about the U.K. and the shopping centers, the U.K. shopping center is making 62% of the NPL portfolio. I was just wondering, is that a kind of problem which may just deal with itself over time, i.e., run down over the next 2 to 3 years? Is that kind of possible? And lastly, you touched on the E sector and the risk of assets to become kind of stranded assets. If you look at your own portfolio, could you maybe compare that to market average? And potentially also to go into the subsectors and maybe quickly outline what is most at risk? And if I understand you correctly that in general, with your prime assets, you see this topic rather not relating to you?

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

You make me slightly suspicious by stressing the optimistic points. We might have overdone it a little bit. I could have avoided your second question. But for your comments, the excess capital question is something which I want to go into in more detail when we have presentation of the Q4 results and the outlook and business planning for 2020. And it should entail a number of strategic initiatives, which also foresee some growth in assets I think we have the capability, we have the possibility. And if -- so the overall development confirms what we have assumed and what we have set out in this presentation as well. I think we have good reason to be optimistic about the further growth in the portfolio but that was more detailed and more substantiation something which I would postpone to the discussion which we have on the 9th of March when we present our results. Now the other point on Poland and the E part of the risk side, which also sort of reaches out to your last point on the effecters. I think there are 2 aspects to be considered. First of all, if you're moving within the prime sector in a location, the value, the sustainability and stability is it such that you can always, or in most cases, can afford to undertake investments in sustainability measures, which are value accretive or protect you against further downturn. And that's one of the reasons why what we say it is important to be in the prime segment because exactly of that risk. And that's why we feel so comfortable. And the second aspect to that is we believe it's business opportunity. If I talk to my clients saying you have a property there with EUR 100 million. And if I look forward to the new taxonomy and the standard is being laid out there, things to come in 2, 3 years' time, then you might have a problem if you keep it as it is. In 3 years' time or 5 years' time we may be faced with a discount of, I don't know, 20%, 30%, unless you do something and you can do something by adding, say, 10% in terms of CapEx -- green CapEx investments to your market value or to your investment thus avoiding a further downturn in value, which is good for the client, but it's also, say, risk protection on our side. And why should we not be able to finance that? Why should we not be able to add some business out of that angle to our portfolio when we finance our book at an average of 52% LTV. I would be more than amenable to the notion that the same clients, the same good client in the prime market with a 52% or 50% LTV and a 60% LTV thereafter the value stability going forward for the next 3 to 5 years because he's done sensible and good investments. So it's sort of hand-in-hand thing. It's a win-win situation, in my view. And that's another point which we give more attention to in 2020. And that's, again, a part of one of the strategic issues, which we presented at that time. There's reason to be optimistic on that side and reason to be, yes, to look into the business side and the business opportunity of ESG. On the shopping center U.K. Now first of all, there will be some rundown by -- until the end of the year. If my calculation holds right, then we have other total stock of 3.6 billion U.K. portfolio, we have approximately 900 million in terms of retail exposure, of which shopping center is again about 1/3. We will see that figure coming down through repayments by the end of the year. We have seen already 2 sales of -- potentially 3 days from -- of shopping centers which, as I mentioned, were within our valuation. So that should be definitely -- and it's already partially off our books. And then if you look at the rest, there's sort of two different sorts of shopping center to look at. One is in a city, a central place, which is something -- which is usually, in German we say [Foreign Language], so nearby shopping centers. And the other type, which is typically further remote located. This is where the problem potentially sits. Valuation-wise, we are -- at this point of time, we are fine, it will depend on the second category. It will depend on how Christmas sales will go and pandemic influence may go. So no elevated headache on that thing. So even if there's still something more to be done, I think we can easily finance that. But presently, I think we are okayish with that.

[Walter Allwicher, Managing Director of Communications]

Next set of questions comes from Johannes Thormann from HSBC.

[Johannes Thormann, Global Head of Exchanges and Analyst]

Just 3 questions, if I may. First of all, on the margins you're seeing currently, it looks like very stable over the last quarters. But of course, we have shifted or see the shift to probably 1/3 of business done in the U.S. Can you elaborate a bit more what you're seeing in terms of margin pressure in Europe? Or has there been a change? Or because some other banks are moving in the market again, or do you still feel comfortable with the European margin? Secondly, on the early prepayment fees. Of course, a whopping amount this year and probably one reason why everybody expects results next year to come down again. What has been driving the huge demand this year? Has there been any regional focus in markets? Or can you -- have you found a pattern why this could be even the new normal, if you could help on this? And then last but not least, on your risk costs, which are probably the reason why you still carefully guide for the full year. What needs to happen? Yes, or put it other way, if we will see the same level of risk costs in Q4, you would massively exceed your guidance. What needs to happen that risk costs increase strongly in Q4?

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

Okay. The last point first, I do not share your view. If we were to apply the run rate which we have displayed over the last 3 quarters, also into the fourth quarter, we would arrive at the level, which is perhaps slightly below the consensus figure, but still a figure in line with our expectations and no massive cost increase -- risk cost increase. So if we trail on as we did over the last 3 quarters, I think we will see a "relatively normal" fourth quarter emerging on that side. Now on the margins. The interesting thing is, first of all, you alluded to the increased share in U.S. business. That is partially right. If you sort of look back over the last 3, 4, 5 quarters, U.S. share of business or new business was actually quite significantly down. Now we do expect to expand further on that, and that should help us in terms of margins, definitely. But otherwise, margin development also in Europe tend to be fairly stable, fairly straightforward. There might be the notion of a little bit more margin discipline as we see it in the markets partially because banks start realizing that wave 4 is although being a little bit delayed, but it's coming. And therefore, I think we are well-positioned and well underway. Now the early prepayments and the drivers for it there need to be a little bit more valuable in sort of explaining where we are. If you look at the rise of early prepayments 4, 5 years ago, there was a significant spike in '16, '17, if I remember that correctly. That was driven by factors such as margin pressure, interest coming down overall markets going up, where people who hold a loan contemplate to refinance at lower conditions. So it was relatively cheap to get -- relatively easy to get a new loan, it was relatively cheap to get a new loan. And for the last 3 years, the prepayment fee was relatively, from a bank's perspective, a lousy thing. So we're relatively high volumes against a low prepayment fee. Now the situation is completely different now for 2 or 3 reasons: a, the market situation is different. We don't have that outlook of that expectation to realize lower margins, cheaper financing elsewhere. The driver is the fact that investors, our clients do see value developments, market developments on their properties, which are so attractive that it completely not only makes up but significantly increase any breakage costs they have to pay. And the pattern which we see is those loans which -- and those transactions, which were conducted, say, 2 years ago or 1 year ago, have attracted, being prime property, prime location transactions, have attracted so much more value that it makes every sense in the world to crystallize or to monetize a 25% value increase against "3% of our bankage fee. "So we -- the pattern which we see is at early stages, the clients come to us. I remember a very prominent case, which we had where the client was a significant billion investment, which we financed not more than 1.5 years ago. Now the very attractive conditions came to us, but 9 months later and said, "Look, would you mind to take the money back because I can sell not at 100, but 130, I found an international institutional investor, and I can't, simply can't refuse that offer. So I still have 5 years to go with you. It's a fixed term agreement and that doesn't make a real difference to me, we'll pay you." And the fees which we start make on that side, and that's something you can see as the fee over prepayment volume is much more attractive than we had it in the times before. So the increase in prepayment fees is not mirrored by the increase in payment volumes. There is an increase in repayment volume -- prepayment volumes, but that is some 50% to 60% more than the years before, while the prepayment fees as such have doubled our troubles. So -- and why do we believe that will carry on? And that's what I said about split markets. We may not see exactly the same levels, but we will see elevated levels of these activities as long as we have a constellation or a situation that we have these prime markets with balance stability or strong increases in particular locations for certain assets, where investors want to monetize and can monetize because they invest with a long-term view and the market shares that long-term new and market liquidity is there. So -- and we profit from these elevated liquidity levels -- transaction levels by pocketing the prepayment fees. That's -- and sort of to close on that question, and I apologize for the more, say, extensive explanation on that. It is a little bit like sitting on the portfolio, which in accounting terms can be compared with the level 1 assets as opposed to level 3 assets, not exactly the same, but just to illustrate. Now if you sit on level 1, you have level 1 assets on the liquids, if you have benchmark pricing and all that. Then you have a certain quality in your portfolio. If you're sitting on level 3, that might still be okay. But it is by far not so transactionable and is not so liquid. And prices are not so easy to establish. I'd rather sit on the first part of the exercise, i.e., sort of product or level 1 portfolio than I sit on the level 3. So what we see going on is a combination of prime segment being relatively value stable, but be more transactionable, and taking more revenues also from that side going forward. Why we still -- and that's my concluding words on that, while we still want to keep our portfolio stable or growing, going back to Mr. Lukesch's point earlier on. So that's how we see prepayments. There's a shift in nature of things. There's a shift in markets, and there's a different quality in prepayments back from -- away from solely one-off event back to something which we will see more often and where we want to have our share of business in.

[Johannes Thormann, Global Head of Exchanges and Analyst]

Okay. the details really helpful. Just coming back to risk cost. As you expect, seemingly, they are stable in Q4 what would, in your view, be needed for a deterioration that we see a strong uplift in the risk provisioning?

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

Why should we see a strong uplift in risk provisioning?

[Walter Allwicher, Managing Director of Communications]

Moving on to Nicholas Herman from Citi.

[Nicholas Herman, Vice President]

Just a few follow-ups from me, please. So on provisions, first of all. I just -- how long -- can you just remind us, how long does the order book say that you -- allow you to keep these provisions or management overlay for? That's the first question. Secondly, could you also just detail a bit more specifically what is driving the increasing sort of -- driving the expected loss shortfall? Third question is just a follow-up on the prepayments. Given the difference in driver for prepayments, i.e., market value rather than cheaper rates, what -- could you just help us quantify or understand a bit better the margin pickup on average that you're getting from these renegotiations? And then finally, just in terms of you referenced the headwinds on the liquidity book in the equity book. What is, I guess -- just could you quantify that drag because from what I can see, it looks like with rate expectations having picked up considerably I would have thought that, that drag would be deteriorating quite dramatically from next year. But yes, interested to hear any comments there.

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

Just to your last question, I'm not quite sure that I understood, you're asking why headwinds from equity book, particularly. And I would add to that from the value portfolio to those such a...

[Nicholas Herman, Vice President]

Indeed, of course, yes. So the value portfolio, of course, I totally get that point. I was just referencing the fact that you talked about the drag from the liquidity book and the equity book. But I would have thought that the drag there given higher swap rates it looks should be it shouldn't be, I -- it wouldn't be that significant from next year. Is that a fair comment?

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

Unfortunately not. I mean, first of all, the structure of the equity book is such that we have turned out quite long. So the drag effect comes sort of every year. The high spot rates you referred to is something which is sort of more recent and relatively small impact. So what you can reckon with is that we have to make good for probably something like EUR 10 million every year where the equity book still is losing carry and losing NII contribution. So that is something as the sort of the old stock sort of winded the way and the new business, which we book on to it has lower margins anyway and lower performance anyway. So the average will become less profitable. And the negative effect becomes less as we move on and should be as compared to some degree by higher spot rates if the interest should move up, but we're still a good deal away from that, so the negative drag carries on basically. Now on provisions, how long to keep. That's a good question. we have internal discussions around that. We have discussions with our auditors. That is something which we will decide in the view of things which are just emerging also on the pandemic side, on the overall economic development, how much of that is affected by the latest developments. And then we will decide what we do. As you may imagine, by nature of things about the nature of pbb, the strong willingness to keep as much reserves as we can. And then we will see how the situation looks like first quarter, and then we will make decisions on that. Now expected loss shortfall. I'm not quite sure whether I got that point. Expected shortfall is basically booked as a capital reduction as we go forward. And as long as we can put against that the build-out of loan loss provisions, which we computed for during the year. As soon as we sort of close our books for the full year, and we have a full audit on that. That is something which we can rectify, then the increase in low loss provisions will be booked against the expected shortfall. We will see whether that covers the gap to 100% or not entirely, but there will be a significant amount, which will be removed from the capital deductions after that. And then we have a new figure. But that's -- you may call it accounting convention as long as we have interim results [indiscernible] not audited. We can't predict that or we can't offset that.

[Nicholas Herman, Vice President]

Just to reiterate, if I heard you correctly, you said about EUR 10 million every year of loss carrying the equity book. Is that...

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

Well, this looks a little bit stern because I think we usually don't disclose that figure. But the figure is not so far away from what it is.

[Nicholas Herman, Vice President]

Okay. The second, just to follow up on the overlay. I guess if I had to be a bit more specific here, if we don't see a notable pickup in provisioning in losses next year, would the auditor allow you to keep that overlay beyond 2022? And then a final follow-up as well just on the expected losses, perhaps again I wasn't that specific, so apologies. Does -- as you mentioned, it basically relates to a difference between the losses and the provisions that you've booked. So presumably then, the management overlay is not being -- or I guess is the expected shortfall inclusive of the management overlay? Or is that a completely separate point?

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

Now first of all, what is the management overlay? The management overlay is basically loan loss reserves, which we built over the past 9 months and should have released against certain parameters which are in a range to the model landscape, which we employ on this exercise for stage 1 and stage 2 calibration. So we should have released EUR 48 million, which we did not, which we did hold back and sort of reserve that as a management overall. Having said that, that also indicates what the determinants are to keep that or to release that. The -- it's a model-driven calculation. The model, basically, if the model is good, our models are good, it prescribes certain actions if certain economic parameters change. So if unemployment goes down, the G&P goes up or things like that, then the calibration of risk model assumes that you can release part of the reserves which we have built. Now exactly that release, we did hold up by saying the model parameters do not fully reflect the actual situation. They were sort of calibrated onto the normal situation, which is not tantamount, it's not comparable to the corona pandemic situation. And therefore, we know better than the model, and therefore, we hold back reserves and do not release it. Now the question is what are the economic assumptions for next year? And how do we build that into our models and what kind of changes we have to pay? There might be one reason to say now with the latest advent or the latest rise of infection rates and a sudden deterioration of economic parameters, we have good reason to carry on with that or there might be other economic parameters, which we found more distinctive in terms of relative weight in our models, and we look into that. On the third model, the third possibility is there are other risks such, for instance, is key risks, which we have not yet fully contemplated in our risk models, which we may have to account for. So that is the discussion which we have with our auditors when we come to it. First of all, we have to sort of said we reached the year-end and see how things have developed and then we look further. But those are the decision points and the discussion points which we have internally first. After that, we make recommendations, which our auditors have to also have to go along with and then we can tell what we do with the reserves. That's the order of things.

[Nicholas Herman, Vice President]

Got it. And just one other question I asked before, which I think you may have missed, and I guess it's not surprising because there were a few. Just on the prepayments, given the difference in driver, i.e., market values of the properties rather than cheaper rates. Is it fair to say that the prepayments that you're seeing now are accretive to your net interest margin or not?

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

Nick, I have to ask again, I'm not quite clear on the question. I apologize for that.

[Nicholas Herman, Vice President]

Just any impact on your net interest margin as a result of the prepayments that you're seeing?

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

I think I know what you're getting at. Now let me put it this way. There is, first of all, there is no correlation between what we get -- or almost no correlation on the -- not straight correlation on the question what the margin is on the loan and the prepayment fee. We get the prepayment fee sort of is a results of the -- question is the fixed loan variable loan. It's a question of the maturity of the loan, the term of the loan. And at the end of the day, the refinancing costs, which are behind that. The point which you may have in mind is in -- which are the loans which are more affected by prepayments. And those are the loans which are sort of closer to 45% to 50% LTV on prime assets, which usually carry a lower margin. So if I were to set up a prepayment model in prediction prepayments, I would say, on those loans, which follow those characteristics, which I just set out, low leverage and low margin and fixed loan, are more likely to see prepayments than others. But the prepayments to payment fee -- so the attractiveness or the profitability of the prepayment depends on the other three factors, which I mentioned just now. Does that sort of answer your point?

[Nicholas Herman, Vice President]

Yes. I'll take it offline.

[Walter Allwicher, Managing Director of Communications]

So we're now moving to Philipp Häßler from Pareto.

[Philipp Häßler, Analyst]

It's Philipp Häßler from Pareto. I have two questions. Firstly, on the cost development after 9 months. Could you give us a figure for the underspend due to COVID-19 for 9 months and maybe also for the full year? And secondly, sorry to come back to the outlook for the current year. I still don't understand. Why -- what must happen that you only earn a pretax profit of EUR 34 million for Q4? So why are you not saying you expect to surpass your guidance but still stick to the upper end of the guidance? I'm sorry that I don't understand this.

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

The second point, I got. Your question is why is it that between the EUR 186 million and the EUR 220 million is only EUR 34 million, where our run rate was around 60% in the previous quarter. Am I right?

[Philipp Häßler, Analyst]

Yes.

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

Okay. I'll come to that in a minute. And the first question was -- that I did miss a little bit.

[Philipp Häßler, Analyst]

To what extent did you benefit from COVID-19 on the cost side through lower traveling expenses or marketing or fewer trade fairs, whatever?

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

Okay. Now the benefit, if you call it this way, the benefit from COVID-19 is probably and was probably not that excessive or that pronounced than you have it with other banks, which are perhaps a little bit more international or international travel or manufacturing companies or whatever. Our participation in international fairs and Congress is rather low -- was rather low and did not change much. So I would -- I know I have the figure somewhere, but I would have to make a guess now. If I were to say, yes, I don't want to give an exact figure. It is -- let's put it this way. It is less than 5% of the half and the nonpersonnel administrative expenses. And it is, by far, exceeded by the fact that we did use this positive effect in reinvesting in our business, i.e., in digital initiatives and regulatory matters and other strategic things. So it's not a big item on all the -- on the guidance, that's relatively easy to explain. First of all, you know from sort of being whether -- not being with the bank but being covering or looking after the bank for quite some time that fourth quarter usually sees a relatively steep increase in costs. Now that's one reason. The second reason is we do contemplate as part of the forecast, that's still finally to be decided. We contemplate some restructuring expenses for efficiency measures in the context of digitalization measures in '22 and '23. And we would also -- if you look at the run rate so far, we would also assume that the prepayment fees may not come into the full extent as we've seen it in the last 3 quarters. So that takes a little bit of steam out of the figures on that side. If you add up these 3 or 4 points, then you're right at the fourth quarter result, which is lower than the previous quarters and therefore, sort of tallies in with the EUR 220 million upper end plus something, yes? Now there's different interpretation toward something is -- what plus is but that's roughly the direction which we said.

[Walter Allwicher, Managing Director of Communications]

As we have no further questions registered, and we'd be inclined to conclude today's call. And as always, I'm proven wrong. And it's like the magic word, say I conclude the call and there is further questions, which we very much appreciate. So Johannes Thormann and Tobias Lukesch have follow-up questions. Johannes, please go ahead.

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

It was a misunderstanding. We wanted to say he's going to have a good weekend now. Can we get assistance from the operator. We have questions registered from Johannes and Tobias. Are they still on? Or is it just that they haven't been taken off the list?

[Operator]

There are no questions. [Operator Instructions]

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

Does that mean we have further questions?

[Walter Allwicher, Managing Director of Communications]

No, we don't have further questions.

[Operator]

There's a question from Tobias Lukesch.

[Walter Allwicher, Managing Director of Communications]

Okay. Well, that's what I saw. So Tobias, please go ahead.

[Tobias Lukesch, Equity Research Analyst]

Yes, sorry. Just on the last comment actually on these efficiency measures and the cost. I mean, yes, you will potentially provide us with some details in '22 -- with the Q4 results in '22. But is there anything -- any ballpark number you can again share with us and kind of excuse if you already mentioned a kind of dimension here. But it would be interesting like to what extent you see that end? Could you kind of preempt these costs and book it in Q4 already?

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

No, not really. We want to keep you interested in what we say about fourth quarter. It's under discussion. But most likely, there will be...

[Tobias Lukesch, Equity Research Analyst]

So more likely no booking in Q4 then?

[Walter Allwicher, Managing Director of Communications]

My list still has Johannes Thormann, but I think we have covered and we answered your question. Is that correct?

[Johannes Thormann, Global Head of Exchanges and Analyst]

Johannes Thormann from HSBC again. Some follow-up questions, please. First of all, on your tax rate for this year, last -- previously, you always said 25% to 30% due to the tax loss carryforward. But this year, we've seen now 2 quarters at least far below 20s. And then what should we expect for the rest of the year and also in the next years? Is this triggered -- but what is this triggered by the early prepayment fees or what has been driving the lower tax rate? Secondly, on your regulatory costs, if I remember correctly, you guided for EUR 31 million for the full year, but we saw now a small credit this quarter. What is your run rate for this in the next years as well?

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

The regulatory cost side, I did not quite understand.

[Johannes Thormann, Global Head of Exchanges and Analyst]

You guided for EUR 31 million previously as an increase for this year. And now we are running at EUR 28 million probably for this year so far. Well, what is your expectation for this year?

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

Okay. You're talking about the bank tax?

[Johannes Thormann, Global Head of Exchanges and Analyst]

Yes. Yes, regulatory charges.

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

I apologize for being slow. Now -- that is not so difficult because the bulk of it has been attended to. And so we presently stand at EUR 28 million, you're right on that. We had EUR 25 million, know that was a full year, EUR 28 million by the first quarter. And we have a run rate of EUR 1 million as the following quarters because the bulk of that has been attended to in the first quarter. So there should not be much more than the EUR 28 million probably in the -- close to EUR 30 million, yes. That's the figure on regulatory costs, as you call it, or the bank tax. And we hope for slightly better figures next year, but that's the hope. Now on tax rate, you could see that the tax rate for the actual quarter or the third quarter was 15%. The full year expectation would be around 20%. We are slight -- or even a little bit further down than the 20%. The driver was the [indiscernible] because we have some exchanges in accounting for certain types of provisions. That's more technical act, which we, I think, already commented on half year figures. And that's the consequence of it. So forecast. To make it simple, forecast for 2021, in terms of [indiscernible] quarter tax rate is a little bit on the better side of 20%.

[Walter Allwicher, Managing Director of Communications]

Thank you, Mr. Thormann. In the meantime, I've learned my lesson. So I will not call for the end of the call, but just ask everyone again if you want to ask further questions, [Operator Instructions].Now I'm confident that there are no further questions, so let me take the opportunity to thank you very much for attending today's call. We appreciate your interest in pbb -- and I should say your continued in pbb. And we look forward to hearing from you going forward. Thank you again take care. Bye-bye.

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

Thank you. Bye-bye.