Good morning, ladies and gentlemen, and welcome to the Deutsche Pfandbriefbank conference call regarding the preliminary results 2023. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. Let me now turn the floor over to your host, Kay Wolf.
Ladies and gentlemen, warm welcome to our today's call. I'm here in the room together with the CFO, Marcus Schulte. Looking forward to this call. I could not have imagined such a great response to my first analyst call. Of course, I'm delighted to see such a high level of interest in commercial real estate finance in general, and in PBB in particular. I also look forward to meeting as many of you as possible in person during the course of the year, as we will start our analyst and investor reach out immediately. I have to admit that we would have preferred to attract such a high level of attention under different circumstances.
But at the same time, I see today's call as an opportunity for us to demonstrate that we, at PBB, take a very realistic view of the current risk situation, and that we have every confidence that we will be able to navigate this admittedly difficult market phase. As you know, I joined the bank just five weeks ago, and I have served in my new position for just one week. To answer the obvious question: No, I do not regret having changed to PBB. The reason that compelled me to take on the role of CEO are still as valid. Firstly, PBB has a crystal clear business focus and a very distinct positioning in the market for commercial real estate finance. We act exclusively as a senior lender. This means that we always enjoy priority as a creditor, concentrating on the first-ranking part of a financing.
This is worth emphasizing, given that a significant proportion of the commercial real estate finance market does not rely on first-ranking claims, and we are not active in this area. This is a fact we can't stress enough in the current market environment. Secondly, as every client will confirm, this bank has a truly impressive breadth and depth of real estate expertise. We are extremely well-versed in special finance, and above all, we know how to deal with cyclical developments. All of these are skills that serve us well in this market phase. And finally, I'm very much looking forward to further developing the bank strategically. I will contribute to sustainably strengthening PBB's future viability, and have no doubts that specialized lenders such as PBB will have a key role to play in the future as well. Will we need to do some things differently? Most certainly.
One key aspect will be to use our excellent real estate expertise to diversify our income sources to a much greater extent. While the PBB 2026 strategy already has the right thrust, I will take the time to discuss modifications and adjustments together with the management board team. I will be able to tell you more about this when we present our results for the first half of the year. We are also planning a capital markets day in autumn. But right now, ladies and gentlemen, we have other priorities. Our focus is on managing risk, navigating the cyclical low. Before I share my thoughts on this with you and provide an outlook for the current year, our CFO, Marcus Schulte, will present his review of the 2023 financial year, with a particular focus on our U.S. exposure. Allow me to express a few thoughts in advance.
I do not want to cross over the wholly unsatisfactory results of 2023, which was not a good year at all. But as you will see, the bank is in a much better position than its recent share price performance on the capital markets might suggest. The reason are the following three facts: firstly, PBB remains a fundamentally healthy and profitable bank, which is well capitalized. Our pre-provision profit of EUR 300 million provides for a solid risk absorption capacity. Our CET1 ratio is more than 600 basis points or EUR 1 billion above the regulatory requirement. However, in light of the current market environment, we deem it as more appropriate to retain 2023 profit. It's important to note, though, that the conditions to pay our AT1 coupon are comfortably met. Secondly, our portfolio remains solid, with an average LTV of 53%.
This LTV reflects property valuation adjustment during 2023, that are in line with the development of the markets PBB is operating in. Our total LLPs of EUR 589 million provide for a coverage of 189 basis points on our real estate finance portfolio. By proactively managing workouts and restructurings, we were able to limit NPL increase in our U.S. portfolio to EUR 300 million. This is an important point. PBB is made and able to manage a real estate finance portfolio through the entire cycle. As a senior lender, we do have an extensive toolbox to actively manage the NPL portfolio, and we successfully used those tools throughout 2023. Finally, pre-funding provides us a strong liquidity position. Our capital market funding needs for 2024 are largely covered.
Our retail deposit growth substituted more expensive unsecured wholesale funding, and we do not plan to issue any Senior Benchmark in 2024. PBB's secured capital market funding is largely covered for 2024, also thanks to strong pre-funding. And last, but certainly not least, we have more than EUR 6 billion in liquidity. This is sufficient, well beyond the regulatory stress requirements, but also well beyond our internal stress requirements that cover 6x the regulatory stress horizon. And now my colleague, Marcus Schulte, will provide some more specific details.
Ladies and gentlemen, also from my side, a very warm welcome. As Kay said, I took over the CFO role in December, and I do look forward to working with all of you in my new role. I also look forward to today's discussion. Before diving into a more detailed analysis of our 2023 financial performance, allow me to briefly walk you through a few highlights on page five. One thing is clear, it was a challenging year. Yet PBB met its adjusted guidance and delivered a PBT of EUR 90 million. NII came out strong despite loss of TLTRO and interest floor income. Our REF portfolio grew with improved margins. New business margins actually grew by 35 basis points to 205 basis points, which is clearly good news. Capital ratios remain robust and liquidity is strong.
In a nutshell, PBB's financial strength and resilience supported us in managing the cycle, and this is what we really saw in 2023. Turning to page six, you can see that the trends around our most relevant balance sheet KPIs are absolutely intact. In the interest of time, I will not comment on details, but let me mention one point: We also made good progress in reducing our non-core portfolio, and were able to reduce selected assets at attractive price levels. Page seven and eight give a comprehensive overview of the key P&L drivers in 2023. The key message is that operating income was up EUR 70 million to EUR 603 million, and pre-provision profit was up EUR 50 million to EUR 300 million. This strong operating performance cushioned the elevated risk costs and kept us clearly profitable. Let's turn to slide nine.
As you know, we committed to bring down costs back down to pre-investment program levels and manage our cost-income ratio to below 45%. However, both 2023 and 2024 are years of investment. As a result, G&A are temporarily up for these two years. In 2023, we saw investments of EUR 35 million across three main buckets. IT transformation. Here we are taking a strategic step to move from a one IT provider to a multiple IT provider structure. This includes insourcing of infrastructure and personnel. The transition and parallel phase will be finished at the end of the year, and fruits will be harvested after that. Digitalization. This went to the development of the Digital Credit Workplace, which is essentially digitalization and streamlining of our credit processes. Again, finishing up this year. Last but not least, strategic projects and restructuring.
Here, the setup of the new business line, PBB Invest, the optimization of office space, severance pays, and restructuring provisions were invested. Let me now move over through risk costs on slide 10. As already mentioned, 2023's risk additions were EUR 212 million for the year. They were largely driven by our U.S. exposure. In Stage One and Two, we have built EUR 62 million U.S. LLPs, including the management overlay of EUR 31 million, to cover for potential additional U.S. risk. This was partially compensated by releases of EUR 59 million in our European book. Here, the improvement of macroeconomic parameters overcompensated portfolio and credit risk-driven migrations. Stage Three additions for the year in the U.S. amounted to EUR 132 million, mainly for our existing NPL. So in total, we added EUR 194 million for the U.S. book.
The total stock of loan loss allowances for the U.S. book is now at EUR 259 million. We have EUR 121 million still reserved for Stage One and Two. On slide 12, you see that the overall portfolio quality remains solid, with focus on prime properties in core locations. Again, I would like to stress that we exclusively act as a senior lender. In 2023, we reviewed the collateral values of the entire portfolio, and saw a reduction that is completely in line with the price developments in PBB's core markets. The still low LTV of 43% in our performing portfolio reflects this valuation reduction. Exposure at risk, which is defined as the layered LTV exceeding 70%, is EUR 232 million.
This compares to the total of EUR 175 million Stage One and Two LLPs put aside for the portfolio, implying a decent coverage of 75%. Now to a few remarks on our NPL portfolio on slide 13. PBB is made to manage REF portfolios through the entire cycle. This is what we do. This is our core USP. We use an extensive toolbox to actively manage our NPL portfolio. We have an experienced team on board, and they have proven our management capacity for major crises like Brexit or the pandemic. Our reinforced active NPL management also proved its value in 2023. We successfully restructured or worked out eight loans with a volume of EUR 320 million last year. Four loans recovered to performing and four loans repaid at or above internal valuation marks.
Now, let's talk about the elephant in the room, which is most certainly our U.S. portfolio. I'm on slide 14. Let me start saying the U.S. is and continues to be the largest liquid and transparent CRE market. Our low market share allows for selective business. We focus solely on the seven gateway cities here in CBDs and predominantly on East Coast office. Right now, our crystal clear focus is on risk mitigation and the existing portfolio. We've decided not to do new commitments this year. We revalued 100% of the portfolio in 2023, with an average revaluation of around -19%. Again, this is in line with markets we are operating in. Same layered LTV logic as before. Exposure at risk is EUR 100 million.
This compares to Stage One and Two LLPs of $121 million, implying a coverage of well above 100% for the performing US book. Looking at the U.S. NPLs on page 15, we again benefited from our active NPL management capacities. We successfully restructured or worked out three loans with a total volume of $201 million. Two loans recovered to performing, and one loan repaid above the internal valuation mark. The U.S. NPL portfolio saw an average revaluation of -35%. Average LTV on this portfolio is therefore 87%. Last, but certainly not least, the following point on this slide. With U.S. Stage Three LLPs of $138 million, I mentioned, valuation reductions of further 30%-40% are covered by a pure layered LTV logic.
This is predominantly the result of the NPL inherent requirement for IFRS impairment tests with different scenarios. This is particularly relevant for those buildings, where we have to consider distressed sales prices, especially those arguably have a low downward elasticity. Another important focus is our development portfolio, which you can see on page 16. Here, we have strict underwriting standards, and we started to downsize the portfolio already in 2019. Since then, we have reduced it by more than 30%. Again, this is senior lending only. We only cooperate with selected and well-experienced large developers, and have been affected by three developer defaults in 2023, compared to the significant number of defaulted developers in the overall market. Our focus is on office, residential, and logistics in major European conurbations, mostly in Germany. Two-thirds in land and finishing phase, where we do not have any immediate construction risk.
Our experts' clear risk management focus is on loans in construction phase, the other third. We saw two new NPL cases in 2023, with Stage Three LLPs totaling EUR 43 million. Further three cases are in land phase, i.e., with no construction risk, and therefore, without Stage Three LLPs. All cases are in Germany, all in very good inner-city locations. Turning to our office portfolio on the next slide, I'd like to stress one point. The European office market is quite different from the U.S., and I think Kay will come back to that later in more detail, so I spare you the details here. But let me say we continue to focus on prime properties in core inner locations and strict risk parameters. The average LTV here is at 56%.
Slide 18 gives you a more detailed view on the NPL office portfolio, but as already mentioned, the LLPs here are mainly driven by our U.S. exposure. Hence, I cannot comment any further on slide 18. Which brings me to the other side of the balance sheet, so let's turn to funding and liquidity. I'm on page 20. This overview page summarizes two key points. Thanks to pre-funding and lower funding needs in 2024, our capital market funding needs for 2024 are largely covered. This holds true for both unsecured and secured funding. Second point, liquidity is strong. At end of Feb, we hold more than EUR 6 billion of liquidity. All regulatory requirements are well exceeded. Also, at end of Feb, LCR remains well above 200% and NSFR is comfortable at 111%.
Over and above that, we have sufficient liquidity well beyond our stringent internal stress horizon, which Kay mentioned, is 6x larger the regulatory requirement. Drilling down into the funding mix on page 21, you'll see that PBB has a well-diversified funding base. 55% of PBB's total funding is secured, the green part of the pie. Notably, with our Pfandbrief, one of the most accessible and stable sources of secured funding, but also other tools, as you can see. For unsecured funding in orange, we have systematically grown our retail deposit base, and retail deposits are in the meantime representing 40% of the bank's stock of unsecured funding. Turning to page 22, I would just like to highlight two key developments. Senior unsecured funding is substituted by retail deposits. The latest senior benchmark issuance was a year ago, and we plan and planned none for this year.
Pfandbrief issuance was EUR 3.5 billion since January last year. EUR 2.7 billion of that was issued since summer, including EUR 800 million year to date. Moving from wholesale to retail on page 25. Retail has been a growing, reliable and cost-efficient source of funding for PBB. PBB's retail deposits are almost 90% term money. They are granular and deposit insured. 80% of our retail deposit base is below 100K, and nearly all deposits are fully insured. And with that, I hand over to Kay, who will walk us through capital, followed by an outlook to 2024.
Thank you, Marcus. Let me come to our capital situation on page 25. PBB is well capitalized. Our year-end CET1 ratio compared to the third quarter, increased to 15.7%. This is driven by, A, the recognition of PBB's full year results, and B, its retention. This overcompensates RWA increases due to our real estate finance portfolio growth and internal rating development. Our buffer to MDA with 600 basis points or EUR 1 billion capital, is very strong. In addition, the bank has an ADI of EUR 2.3 billion. On that basis, conditions to pay the AT1 coupon in April are comfortably met. On page 26, we are looking ahead. PBB will become a foundation IRBA bank following Basel III implementation in 2025 and ECB approval.
With this, we recognize the industry's increasing challenges to adequately model low default portfolios under advanced IRBA requirements. Given our current level of RWA density, we do expect the Foundation IRBA-based CET1 ratio at or around our current levels of larger than 15%. However, in this transition to Foundation IRBA, there will be a period in which we will temporarily use standardized model parameters that will technically increase our RWA by EUR 3 billion-EUR 4 billion. With our proactive portfolio management, we do expect the CET1 ratio to remain at or above 14%, so it remains well above our regulatory requirements throughout the entire transitional period. Let me now take a broader look at 2024, starting on page 28.
We expect GDP growth in Continental Europe, while the U.K. is expected to grow again by 0.5% this year and 1.3% in 2025. U.S. GDP should expand solidly over the next two years. Of course, inflation developments are key for this year's outlook. If market consensus is right, central banks will begin lowering interest rates in mid-2024, amid inflation on track to return to the 2% target. Such an interest rate development in Europe and the U.S. will certainly help to stabilize the real estate market. Consequently, the first half, 2024 should remain challenging, and we expect to see further valuation corrections for the U.S. office properties, although at lower levels compared to 2023. However, due to different market structures, we do not expect a development in Europe that could be compared to the U.S.
Of course, we do expect a further fall in prices in some segments, as we have already seen this in this year, especially against the backdrop of structural challenges in working practices. But this correction is likely to remain much more moderate, as we have seen already also this year. This is because the market structure in Europe is different from the U.S. For instance, demand for ESG compliant prime investments, a segment where PBB is well positioned, remains strong. After all, working from home practices differ from the U.S., as do structural vacancy rates. Last but not least, existing financing structures in Europe do allow for a more adequate adjustment process to the new interest rate environment. Ladies and gentlemen, what does this all mean for the current financial year?
Turning to page 29, we are confident that in this late phase of the cycle, we will be able to move key KPIs into the direction to further develop PBB successfully. We anticipate new business in a range between EUR 6 billion and EUR 7 billion, considering the market situation slightly below the previous year's level. Once again, the focus likely to be on extensions. Our portfolio is likely to remain stable at between EUR 30 billion and EUR 31 billion. On this basis, and confident that margin on new business will continue to rise, we anticipate our operating income in a range between EUR 525 million and EUR 550 million. We expect our loan loss allowances to be lower than 2023, but still on elevated level compared to historic levels. Based on that, we expect the pre-tax results to be significantly higher than in the previous year.
Now, even though it would certainly be premature to discuss future capital distribution based on this positive forecast, of course, we want our shareholders to continue to participate in our success in the future. Ladies and gentlemen, as you can see from this honest review, PBB is in a much better shape than recent performance of our share price and unsecured debt products would suggest. The fact is that the bank has remained profitable throughout this difficult market cycle, and as things currently stand, it can be expected to stay that way. This confirms the strength of our business model and our market approach. Nonetheless, we will need to develop our strategy further, with a particular focus on our three pillars: profitable growth, diversifying income and funding, as well as enhancing cost efficiency. Thank you very much for your attention.
Marcus and I will now be happy to answer any question you might have.
Ladies and gentlemen, we will now start the Q&A session. Please note, questions may only be asked by equity buyside analysts. To raise a question, please press nine and star on your telephone keypad. The first question comes from Johannes Thormann, HSBC. Please go ahead with your question.
Hello, everybody. Three questions from me, Johannes Thormann, HSBC. First of all, can you elaborate a bit more on the new NPLs and the recovered loans in the U.S. and also on the NPLs in the German development business? What kind of properties, what sizes, and then the any lessons learned from those defaults? Secondly, I feel you're doing the same error as previous management by stopping new business in the US at the depth or low point of the market, when opportunities normally offer the best point. This reminds me of the old strategy of stopping hotel business in 2020, when it was a nice pickup point in terms of margins. Why do you think it's now smart to do so?
And last but not least, considering your dividend cut, what has been the main driver behind this decision? Because you said yourself, just in the call, you're well capitalized. The payment of EUR 0.25 would have been probably less than 1% of equity, and you did a big disservice to your investment case. So, what has been the main driver? Has there been so much regulatory pressure, or please elaborate. Thank you.
Thank you very much for your questions. Maybe I start exactly the same order that you brought that in. To elaborate on our NPL, in particular in the U.S., and I think you asked also for the development portfolio. I think to clearly outline, and we have that on the page, 100% of our NPL in the U.S. is on office property. Yeah, this is where, honestly speaking, we have seen the big development that is driven by the composition of our book there. 80% of our book is on offices. And you ask around with regard to an outlook of that development. As we have shown this year, we have reflected a 19% value reduction in our performing book.
That is in line with exactly the market in which we operate in, and we are operating only in the seven gateway cities in the U.S. So from that perspective, on the performing book side, we have reflected that market development. On the non-performing side, we have reflected 35% value reduction, and have kept that, and have reflected a much higher value reduction in that portfolio. Nevertheless, given that we are a senior lender, we stay below 100% LTV. So we still have 87% LTV in our U.S. NPL book. On the development side, which is primarily focused in Europe, and here in Germany, there are only a handful, as Marcus has outlined, cases that we have there. Some of which are driven by defaults of developers.
I'd like to stress that we only had three defaults of developers in our client portfolio. That compares very strongly when you consider what's currently happening in the market, in particular in Germany, but it also extends to Europe. The cases that we have in that NPL portfolio are residential and retail properties, and they are in prime location in German cities. Last but not least, I think you are typing with not being on mute. I can hear the typing. Last question, the next question with regard to our U.S. market approach at this point in time. Our focus clearly is currently on risk managing the existing book. This is where the priority sits, and I think that priority is right at this point in time. Of course, we are monitoring the market very closely.
We have not decided, and I deliberately want to stress that, to leave the U.S. market. That's not the case. On dividend cut, we deem it as appropriate at this point in the cycle, and given the uncertainty that is still out there in the market, balancing the interest of all stakeholders of the firm. That has been the foundation of our decision to retain 2023 earnings. This does not go without saying, as I have stressed, that going forward, we want to retain an attractive share for our shareholders.
Okay, then the next question comes from Marlene Eibensteiner at Deutsche Bank. Please go ahead with your question.
Yes, hello, and thank you for taking my questions. I would have three. I understand it is still really early to talk about dividends for 2024, but would your base case assumptions include that you would continue paying out in 2024 at the usual payout ratio? Or how significant would the profit before tax increase need to be to make it possible again? Secondly, you mentioned the exposure at risk of EUR 100 million for the U.S. office space and EUR 232 million for the total real estate finance portfolio. Could you please shed some light on the value decline of that exposure so far? And what is the value correction on the EUR 600 million with LTVs above 70%?
And thirdly, on the planned run-off profile for the non-core portfolio, and the asset reduction acceleration, should we expect the magnitude to be significantly higher than the EUR 2 billion we've seen in 2023? And how much of that is in Pfandbrief, meaning how much cash do you generate by running down the value portfolio? Thank you.
Thanks Marlene, thanks very much for your questions. I would take the first two, and I would leave the third one to Marcus on that side. Marlene, honestly, it is, at this point in time, way too early to talk about profit distribution for 2024. So from that perspective, I do not want to provide any further and deeper guidance. However, I'd like to stress, we want to be an attractive share. Yeah, so from that perspective, that remains our focus. And that should be the key consideration around dividends for 2024. With regard to your second question, I go to the respective page, and you're referring to our stress test portfolio. Yeah.
Of course, we do expect, as I have outlined, in 2024, further pressure, in particular on, office properties, in the U.S. to a lower extent than in 2023, and also, in Europe, yeah. So hence, the way we look at it, we have—when you, when you see that in our U.S. portfolio, on the performing side, on that stress, and to elaborate on it—we would consider, a 10%-20% further reduction of LTV. Yeah, further price reduction in that magnitude. The affected exposure at risk, and that's why we call it that way, we have circled around that. That would be the exposure that we see at risk. In the U.S., it is, a $100 million, and I think in the, in the office portfolio overall, it's a $218 million.
What you need to consider there, those portfolio parts, yeah, we look against our level one and level two provisioning that we have built. In particular, in the U.S., as you have seen, we have put an additional management overlay of $31 million in place. We deem that portfolio at risk well covered with our current provisioning levels. The value decline, you asked for that, that we have seen. We have outlined in the U.S. portfolio, it's 19% when you look at the performing, and that's only the value decline between end of 2022 and end of 2023, and that's based on the full revaluation of that portfolio in this year. So it's 19% on the performing side, and it's 35% on the non-performing side.
So you see, we have really considered a lot of the market downturn already when we talk about our existing LTV. In Europe, and in particular in Germany, market decline has less severe, yeah. On average, we have seen a value reduction in the office portfolio in our book of roughly 10%. Both the European as well as the U.S., is in line with what we have seen in the market in which we are operating in. And Marcus, would hand over to you.
Yeah, thank you very much. So on the non-core portfolio, clearly you saw a slightly accelerated move with EUR 2 billion down this year from EUR 14.4 billion to EUR 12.4 billion. I think you cannot extrapolate that to the future. I think we said before that we would expect that portfolio to go down to below EUR 10 billion by 2026, and I think that holds. That essentially means you can rather expect EUR 1 billion or so each year from here, so slightly less than what we've been seeing this year. On the question, yes, of course, you know, we are talking about assets that are fundamentally and generally eligible for PF, for Public Sector Covered Bonds.
And therefore, indeed, these sales are from a liquidity standpoint, rather a liquidity neutral, cash neutral, and, that's basically the answer, to that question. So cash neutral in effect.
Thank you.
Also what I wanted to say is, on the other hand, of course, we also use the opportunity of reducing the non-core asset side to here and there buy back public sector Pfandbrief to basically align both sides of the balance sheet a bit, but these are two independent moves.
The next question comes from Jochen Schmitt, Metzler. Please go ahead with your question.
Thank you. Good afternoon. I have three questions, please. Firstly, again, on your decision not to pay a dividend for 2023, did you-- did the regulators ask you not to pay a dividend, or was that completely your own decision? Secondly, on slide 26, you state a temporary uplift of RWA of EUR 3 billion-EUR 4 billion due to application of standardized model parameters in 2024, to be partly offset by RWA reduction measures. Taking the midpoint of your expectation of the temporary uplift, i.e., EUR 3.5 billion, before considering any offsetting measures, this would, according to my calculations, reduce the CET1 ratio temporarily by around 300 basis points. Is that right? And in this context, could you get a bit more precise which type of RWA reduction measures you plan?
Third and last question: Do you have any average vacancy ratio for the office properties underlying your U.S. NPL portfolio? These are my questions.
Thank you very much. I take, starting with your first question, I can give a short answer. It was and is our decision, solely. To your, second question, the logic that you were talking through, I can confirm. I think the downside of 300 basis points, it's, it's roughly right. So from that side, confirming on that. And to your last question on that, the RWA—Sorry, to your second part, to that second question, on RWA, measures, we do consider various measures, yeah? One of which is, of course, looking at risk transfers, and reducing some parts of the portfolios, that certainly be one. The other one is very intensively also managing our existing book. Yeah, so from that perspective, we have various measures, put in place, internal one and also market-driven one.
Then your last question was on the vacancy rates. I would defer that for a moment, and we might come back to that question.
Thank you.
The next question comes from Borja Ramirez, Citi. Please go ahead with your question.
Hello, good morning. Thank you very much for taking my questions. I have three, if I may. The first is, if you could please remind me of your assumptions for office prices in the U.S. and in Europe for the next 12 months-24 months. Then my second question would be, how do you see the NPLs evolving going forward across the U.S., I mean, in Europe? And also, if you could please give some details on the Q4 evolution in Germany in the NPLs. And then lastly, I would like to ask, if you could give some details on the loan loss provision assumption for 2024.
I understand it may be lower than EUR 212 million in 2023, but just to understand, if you could give a bit more details and also the underlying assumptions behind those loan loss provision expectations? Thank you.
Then probably start with your third question. I think what we have been guiding towards is that we do expect a lower than 2023 CLP in our plans. You see from our numbers that we have been at 64 basis points in net new additions in 2023, so we will come in lower. But we do expect higher than what we have seen on average in the past. Yeah, and that lower boundary sits around 20 basis points-25 basis points. So in that range, we do expect our CLP to come in. We see that we are in the late part of the real estate cycle. So from that perspective, we expect 2024 to be at a higher level.
But then also, you know, looking beyond that, further coming down on the, on the CLP side. The first question, I did not really get 100% because there was a bit of noise on the line. May I ask you to repeat that question?
Yes, of course. Sorry. My first question was, if you could please, remind me of your, assumptions for office CRE prices for both the U.S. and in Europe. Because I think, at least for Germany, the, the German Association of Pfandbrief Banks, I think they, they, in the latest press release, I think they, they indicated they expect prices in, in German offices to continue to decrease, but I, I may, I may have, misunderstood. Thank you.
Yeah. Thanks very much. And yes, as we have outlined, we do expect a further price reduction in the U.S., and also in Europe, yeah. That is in line with the VDP assumptions. We are in line with that. In the U.S., we do expect, of course, and I've spoken about the -19% and the -35% in 2023, we do expect a much lower price reduction in the U.S. for 2024. And currently assuming also a bottoming out on that, when we go into the second half of 2024. And I think your third question was around the NPL development in our non-U.S. book. Yeah, I think that's what you're referring to. I think the key focus is there on page 16, yeah.
Primarily driven by our development book in the fourth quarter. We have seen a handful of cases, very specific, idiosyncratic. Nothing that deliberately relates to a broader market disruption or negative development there. Isolated insolvencies on key developers, yeah? And as I said, it might sound strange, but we are proud of the fact that in a very difficult market environment for developers in particular, we have only been affected by three defaults of three developers in our portfolio. Testament that we have been very strict on our underwriting standards in the past, and also started to reduce our development book already since 2019. Those developments are not in office. They are in retail and in residential. They are in absolute prime locations.
So from that perspective, we are working together with the client through those individual cases.
The next question comes from Dieter Hein, Fairsearch. Please go ahead with your question.
Yeah, good afternoon. I have three questions focused on income statement and your targets. You showed a tax credit, a slight tax credit in 2023 compared to tax expenses for 2022. Could you give a little bit background information how you get this tax credit? And regarding the current year, what tax ratio do you expect in the future, or maybe again a tax credit? Secondly, if I add your income from realizations and other income, it was in 2022, EUR 14 million together, and now it increased to EUR 117 million for 2023. What do you expect from these two items in the current year? And then the former CEO released some profit targets for 2026.
As far as I have seen, you confirmed only so far the cost-income ratio of below 45%. What is regarding the operating profit guidance of above EUR 300 million for 2026, is that canceled? And as well, the dividend policy was up to 2025, 50% ordinary payout ratio, plus 25% special dividend if the development of the operating profit is reached compared to the targets announced. Is this dividend policy canceled or not? That's currently all.
Thank you very much. I would probably start with your last question, and then Marcus will cover the other two with regard to tax credit and our other income position. I have to say, I'm now here in the bank for five weeks, yeah, and my focus admittedly has been navigating what's currently happening with the firm. Focusing very much on the key topics that we also address today around the key portfolios that require our focus at that point in time. I have not had the chance, to be honest, to look beyond that with the management team.
As I have said, we are going to arrange for a Capital Markets Day in autumn, and I will review together with the management team the further strategic direction of the firm. We will communicate that then at a later stage.
Okay, fair enough.
Okay. So I will start with the more comprehensive question on operating income. I think that was made quite transparent on slide eight. I will not go through the details, but clearly, we were always benefiting from realization income, mostly when our clients prepaid loans early, and we had prepayment income. And you see that was a moderate part of this year, of this last year. What we saw, of course, is in there with the accelerated disposal in the non-core portfolio, that the asset sales that we did generated some profit. You can see the numbers. I don't need to repeat it.
Yes, sorry to interrupt you.
Yeah.
But I asked not regarding the development in 2023-
Yeah
which I saw in your slides. I was focused on your expectations-
Yeah
regarding these items, for the current year.
Yes. So, basically we saw disposal of assets, we saw buybacks of liabilities, and we saw some client prepayments, and we expect all these trends to remain intact for this year as well. However, to a slightly smaller magnitude, is the short answer to your question.
Okay. Thank you very much.
The other question was on the positive tax effect. This is a combination of the minimum tax that we have in the East, and then we have, of course, positive DTA, as you know, which lead to this result.
What is your expectation for the current year? Tax credit again or expenses?
The normal minimum taxation is 15%.
Okay, so, you expect expenses for the current year?
Yes.
Thank you.
The next question comes from Philipp Hässler, Berenberg Securities. Please go ahead with your question.
Yes, hello. Thank you, everyone. Question left from my side. The outlook for the current year, you forecast net interest income of between EUR 475 million and EUR 500 million. Last year, you achieved EUR 485 million, and particularly H2 was very strong. Maybe you can elaborate a little bit why you don't expect higher net interest income. Does it, so does it have something to do with funding costs or whether some one-offs in H2? Some more details would be helpful. Thank you.
Yes. So thank you. I will take that question. So as Kay said, I think we would expect a somewhat moderate new business production, and we would also expect a stable EUR 30 million-EUR 31 million, you know, REF book. You know, at or slightly below the current level. I think we would continue to see margins, you know, robust and, and strong. I think we would still benefit from, on the liability side, from a, you know, ongoing substitution of unsecured in the stock, with deposits. But probably we would see some upward drift, on the, on the Pfandbrief, on the collateralized funding already per the funding that we did, the EUR 800 million, this year.
Okay, but if I take this together, I'm a little bit surprised that you expect NII more or less to remain stable only.
Well, you know, you see the portfolios roughly, slightly, going down. However, margins are at the same level or slightly up. You see that you have a positive effect from deposits, and you see you have a counterbalancing effect from Pfandbrief or covered funding in general, equals out roughly.
Okay, thank you. And our last question is a follow-up from Borja Ramirez, Citi. Please go ahead.
Hello. Thank you. Sorry, just a couple of follow-up questions, if I may, on funding and liquidity. I would like to ask, firstly, if you could kindly provide the NSFR as of February, because I think you gave details as of February for liquidity and LCR, but maybe that could be helpful. And then, my second question would be, according to your mortgage Pfandbrief cover pool disclosures, you have EUR 5.5 billion of cover pool that is maturing in 2024. I think, around 63% has a bullet repayment.
I would like to ask how you see the, if it's going to be, these maturities will be refinanced, or are you—'cause I guess that the evaluation of the collateral may be lower, the interest rate may be higher. So just checking how you're seeing these maturities of the loans. Thank you.
Yeah, thank you very much for that, for that question. So, the NSFR, we don't publish intra-quarter, like most banks don't. So, we only publish the year-end figure. This is a more involved computing exercise than the LCR, which we have, you know, available more frequently. But both we don't publish intra-quarter, and I think that is the case, for most banks that I know. On the collateralized funding, thank you very much for that question. I think the key essence, if you look at the slide 21, is of course, that collateral comes down, you know, is available to be used in different shapes or form, depending on what collateral it is. It can be repos, it can be packed into a new Pfandbrief, and issued to the market.
So essentially, I think page 21, the green gives you a good view on what means are available to refinance collateral that comes back. Generally speaking, you know, we have a very high amount of high liquid assets that are readily available for repo and also central bank funding. And then we also have, of course, over-collateralization of our own covered bonds and the collateral that is coming back that you mentioned. And these we would then repack into new Pfandbrief and reissue to the market, or in cases, also repo in the market.
Thank you very much. One quick follow-up question. Sorry, if I may. And I may be asking a simple question, but your LCR of over 200% as of February, I just to check, post the TLTRO maturity in March, I just, I would like to ask if that would change. Thank you.
No, I don't think that the TLTRO, which is in the summer, would have a great effect on the LCR, which we can manage and will manage with various means. Also, here, the TLTRO just means that collateral, in this case, high liquid assets, come back to us, and we recycle them to cash again, in the repo market or otherwise. So no effect to be expected from that on a material level.
Thank you. Yeah. Very clear. Thank you very much.
There seems to be no further question at this stage. Then I would say also in the name of Marcus and the entire team here in Garching, thank you very much for the large participation and the large interest. Thank you very much for the very good question. And I hope together with Marcus that we have been able to demonstrate to you that PBB is a very solid bank, well-capitalized, strong liquidity, and with a clear business focus going forward. Looking forward to get to know you all in person soon. And for today, I wish you a good rest of the day. Thank you very much.