Good morning, ladies and gentlemen, and welcome to the Deutsche Pfandbriefbank AG Conference Call regarding its Nine-Month Results 2024. At this time, all participants have been placed on a listener-only mode. The floor will be open for questions following the presentation. Let me now turn the floor over to Kay Wolf, CEO of pbb Deutsche Pfandbriefbank.
Thank you very much, ladies and gentlemen. A warm welcome to our analyst and investor call. I'm very much looking forward to taking you through the facts, figures, and data for the third quarter and the first nine months, of course, together with our CFO, Marcus Schulte. As usual for the third quarters, figures are based on IFRS for the group and have neither been audited nor reviewed. After the presentation, we have reserved sufficient time for your questions. The third quarter was a solid quarter for us. In the first nine months of the year, we were able to increase our operating result to EUR 425 million, up 2.4% compared to the same period last year. This is largely driven by an increase in net interest income to EUR 359 million. Here, we continue to benefit from our focus on profitable new business with notable higher margins.
Pre-tax profit reached EUR 87 million after EUR 91 million in the same nine-month period of the previous year. Our pre-provision profit, however, increased 16% to EUR 227 million. This allowed us to well cover the expected elevated risk provisioning of EUR 140 million for the first nine months. Looking at Q3 risk provisioning in isolation, though, it's down 34% compared to Q2 2024. With this result, we currently remain on track to fulfill our financial guidance for this year. Looking at the CRE markets, we see clear signs that we have reached the bottom of the current cycle. We are observing that investment volumes start to rise, although from and at a low level. Property yields appear to have reached their turning point. We expect this to continue in the fourth quarter. However, we continue to have a realistic view on the CRE market. We do not yet see a sustainable turnaround.
When looking at the wider macroeconomic and geopolitical environment, we see heightened uncertainty. Market volatility has clearly increased during the past weeks. While the results of the U.S. election were no real surprise, the speed of the recent events in Germany came unexpected. We appreciate the fact that political leaders have decided on a way forward since yesterday evening because we cannot afford this kind of uncertainty here in Germany. This is even more important as during the last couple of weeks, we observe a further increase in geopolitical uncertainty. At the center of this is the U.S. future stance on the war in Ukraine, its relationship with China, NATO, and the conflict in the Middle East. At this point, we hope and ask for prudence from all political leaders.
When looking at the economic agenda in the United States, it can be expected that significant tariffs on imports from all trading partners will be introduced. This would, in particular, affect export-oriented countries such as Germany. Another plan, such as extensive tax cuts and higher government spending, would further boost economic growth in the United States. On the other hand, the plans to subsidize conventional energy sources could lead to lower energy prices and thus provide also a positive impetus for growth. There may therefore also be tailwinds for the U.S. commercial real estate markets. However, there is no clear picture on all of that yet. We expect that these partly opposing trends will keep volatility high in the foreseeable future. We are keeping a close eye on all of the developments mentioned here today and their implication on our business.
Our rational and realistic assessment is that this uncertainty and volatile environment will remain with us for the next quarters. Irrespective of this, we believe that we are well positioned, especially with our Strategy 2027, to make pbb more resilient and significantly more profitable in the coming years. As a reminder, we have set four strategic directions. First, the strengthening of our core business, commercial real estate financing. We plan to achieve this by diversifying our portfolio into future-proof asset classes and focusing on high-growth business, including newer asset classes such as Data Centers and Serviced Living . In future, this will take place in the Real Estate Finance Solutions division. Second, the development of a significant commission and fee income business, which from now on will be the new Real Estate Investment Solutions division. Third, the value-preserving reduction of our non-core portfolio.
Fourth, increasing efficiency and adapting the current operating platform, also making further enhanced use of technology and artificial intelligence. We plan to more than offset the investment costs for the development in our new business areas by significantly and strictly implementing our ongoing cost measures and initiating additional cost savings. Our cost income ratio is expected to fall to below 45% by the end of 2027. In the real estate finance solutions, we expect our portfolio to remain largely stable. However, the composition is expected to change significantly in order to better reflect structural market developments with high potential. These include macro trends such as growth of e-commerce and cloud computing, the increasing demand for living space from students, and an aging society in the industrialized countries. We will therefore address high-growth asset classes such as Data Centers, Serviced Living , and Senior Living.
In addition, new business in logistics, hotel, and retail sectors will increase, while the office and residential sector will be given a lower weight. With this portfolio optimization, the business segment's contribution to earnings should continue to rise despite a largely stable volume, especially as loan loss provisions are expected to normalize over the next few years. The new Real Estate Investment Solutions division combines our off-balance sheet commission and fee income business. This segment will have two pillars. First, PBB Invest, our asset management. Organically and inorganically, we plan to grow assets under management to EUR 4 billion -EUR 6 billion in total by the end of 2027. Second, with Originate and Cooperate, we want to take an active role in the structural changes of the European commercial real estate finance market.
In Europe, we see a fast-growing market of real estate finance provided by institutional investors, a development that follows the U.S. market, where around half of the financing volume is already provided by this investor base. In partnerships, we want to offer this rapidly growing investor base, in particular our sourcing and structuring expertise, but also products such as due diligence and loan servicing. We will become a service provider, expanding our share of the changing value chain for real estate financing, and doing so with significantly less capital employed for this business. We were able to announce our first success in this area a few weeks ago. We want to join forces with Starwood Capital, a leading global private investment company with a focus on property investments, as part of a partnership to participate in joint lending and origination.
This is an important step for us because it shows that the interest in corporations in a structurally changing European commercial real estate market is high, and PBB is a recognized and sought-after partner for this. We have stepped up our efforts, and we will continue to make progress here, as the real estate investment solutions division is expected to generate around 10% of the bank's total income by 2027. Talking about progress made in developing our business strategy, we have also progressed in our transition to become an F-IRBA institution under the new Basel rules that apply starting in January 2025. We have now received final approval to change our risk models and will apply the F-IRBA approach as the modeling and risk standard for the majority of our real estate finance portfolio from 2025 onwards.
This will conclude our transition into the new Basel regime and provides a reliable, stable foundation on risk model for capital requirements in our core business. At the end of September, our Basel IV pro forma CET1 ratio stood at a strong 17.3%.
And with that, I would like to hand over to our CFO, Marcus Schulte , for a more detailed look at our nine-month results.
Thanks, Kay. Good morning also from my side. Let's start, as usual, with an overview of the business-related metrics on page 6. As we have emphasized now several times, we put a stronger focus on profitability in our core business. With this approach, we were able to significantly improve the average gross interest margin by around 40 basis points to around 240 basis points compared to the first nine months last year. On the same note, our REF new business volume , including extensions, is at EUR 2.5 billion in the first nine months, down from previous year. Against this background, we expect REF new business volume of around EUR 5.5 billion for the full year, which is slightly below our initial guidance of EUR 6 billion -EUR 7 billion.
The volume of our existing portfolio declined to EUR 29.1 billion in the first nine months. This, in particular, reflects the EUR 900 million portfolio transaction as part of our active balance sheet management in May, but also our more selective and profitability-driven focus in line with our Strategy 2027. That said, we expect our portfolio to increase again to slightly below EUR 30 billion by the end of the year. We are making further good progress in optimizing our non-core portfolio through accelerated but value-preserving sell down. Since beginning of the year, we reduced the portfolio by EUR 1.6 billion to EUR 10.8 billion, EUR 400 million of that in Q3. Of the total EUR 1.6 billion reduction, EUR 1 billion is attributable to active asset sales.
At the same time, we repurchased some of the corresponding public sector Pfandbriefe on the liability side of the balance sheet. As previously mentioned, we had stronger than expected inflow in retail deposits in the first half of this year, actually exceeding our needs. With cost-efficient external rates, we therefore managed the PBB Direct volume down by EUR 300 million to EUR 7.8 billion in Q3, and we are still targeting a volume of around EUR 7.5 billion at year-end. Moving to the P&L overview on page seven, operating income rose by 2% from EUR 450 million in the first nine months last year to EUR 425 million in the first nine months of this year. This was mainly due to the more than 3% increase in net interest and commission income to EUR 362 million. I will come back to this in more detail.
With strict cost discipline, we were able to keep our general and administrative expenses stable year over year at EUR 179 million, despite the overall inflationary pressure, and although expenses in the third quarter rose to EUR 64 million as expected due to IT and strategic investments. In this context, we expect a further cost uplift in the fourth quarter. Accordingly, we expect the cost-income ratio to rise temporarily from the current 46% to 57% by year-end, as already communicated before. So, based on solid operating income and cost discipline in the first nine months and considering lower bank levies, profit before risk provisioning was up by EUR 32 million, or 16% year over year. However, as expected, at minus EUR 140 million, risk provisions remained at an elevated level, up EUR 36 million compared to the first nine months of last year. This is because the first half of 2023 had lower loan loss provision levels than the first half of this year.
In the isolated third quarter of this year, risk provisions came significantly down by 34% quarter on quarter to EUR 37 million, benefiting from releases in stages 1 and 2 due to improved macroeconomic parameters, and here predominantly interest rates. All in all, risk provisions remained dominated by U.S. office loans and German development loans. All this led to a solid pre-tax profit of EUR 40 million in the third quarter, the strongest quarter since Q2 last year. At EUR 87 million, pre-tax profit for the first nine months is therefore on prior year level. As of now, we are therefore on track to achieve our full year forecast for 2024, even though the macro and market environment remains challenging. As already mentioned by Kay, namely the impact from the development of interest rates, especially in the U.S., needs to be monitored.
This brings me to slide 8, the first deep dive. As mentioned, the operating income increased by EUR 10 million, or 2% year over year, to EUR 425 million, essentially driven by a more than 3% increase of net interest and commission income to EUR 362 million. This was driven by a slightly, i.e., EUR 400 million higher average REF portfolio and at the same time an increase of the average portfolio margin. At the same time, the non-core portfolio decreased and funding costs were up. Realization income and other operating income remained largely stable compared to the previous year. At EUR 57 million, the realization income had a positive impact here. It compared to EUR 45 million in the same period of the previous year. This is due to the aforementioned sales from the REF and non-core portfolio, as well as the buyback of liabilities. If looking at the quarterly development, operating income was also up by EUR 15 million.
Here, the EUR 10 million decrease in NII and NCI in Q3 2024 mainly reflects the portfolio reduction, especially the portfolio transaction in Q2 and higher funding costs. Equally higher realization income was driven by EUR 13 million from asset sales and EUR 8 million from liability buybacks. EUR 12 million other income in Q3 especially includes positive impacts from sharply decreased interest rates, including one-offs of a tax reimbursement. Let me conclude this page by saying that also on a quarterly basis, profit before risk provisioning was up by EUR 8 million.
Turning to risk provisions. As expected, our risk costs remained at an elevated level in the first nine months, with net income from risk provisioning of minus EUR 140 million, but significantly down to minus EUR 37 million in the third quarter, minus 34% from the minus EUR 56 million in the second quarter. The decline in risk provisions in the third quarter compared to the second quarter was supported by net releases of EUR 22 million in stages one and two. This is due to improved macroeconomic parameters, in particular interest rate levels in the U.S. and Europe. This also includes the complete release of the management overlay, which was formed for risk in the U.S. real estate markets that have in the meantime transpired into stage 3.
Additions to stage 3 in the third quarter were at EUR 59 million and continue to be primarily attributable to office properties in the U.S. and project developments in Germany, plus some additions for legacy U.K. shopping centers.
Slide 10 then looks at the stock of loan loss provisions as usual. Year over year, the total loan loss allowance decreased slightly from EUR 589 million to EUR 568 million, as releases in stages one and two overcompensated for additions in stage III. The net decrease in stages 1 and 2 was mainly driven by the full release and consumption of the management overlay of EUR 31 million, as well as model-based releases of EUR 21 million due to improved macroeconomic parameters. The net increase in stage 3 was mostly driven by additions for U.S. office and German development loans.
Looking at the isolated third quarter, we saw a net increase of EUR 29 million in loss allowances. While stage 1 and 2 loss allowances further decreased by EUR 29 million quarter on quarter due to improved macroeconomic parameters and the release of the remaining U.S. management overlay, stage 3 loss allowances increased by EUR 58 million from the previously mentioned areas. Net additions were EUR 32 million for U.S. office, EUR 8 million for German developments, and EUR 17 million in the stock of loss allowances for U.K.
This brings me to operating expenses. All in all, we kept strict cost discipline. Year over year, we managed to keep operating expenses stable, successfully mitigating the inflationary cost pressures as mentioned. However, in the third quarter, we saw, as communicated and expected, a cost uplift of EUR 7 million quarter on quarter to EUR 69 million, driven by a normalization of personal costs after provision releases in the second quarter and an increase of non-personal costs from IT and strategic investments. As envisaged, we expect a further uplift in the fourth quarter. This will particularly be driven by the change of our IT provider and insourcing of IT, with parallel technical setups in the current phase before the previous provider is replaced by the end of the year. We are now well advanced in this process.
Furthermore, we continue to drive digitalization and strategic projects forward. In total, we expect cost income ratio to temporarily rise from the current 46% to 50% by the end of the year, as already mentioned. Let us now turn to the portfolio. As you can see, the performing REF portfolio on page 13 has decreased by EUR 3.3 billion since the beginning of the year to EUR 28.2 billion at the end of September. The reduction in the first nine months is mainly due to loan repayments and the portfolio transaction of EUR 900 million in the second quarter.
Regionally, we namely saw further reductions of the U.S., as well as the office and the development portfolios. This is in line with Strategy 2027. As we are in a late commercial real estate cycle with markets bottoming out, it is not a surprise that 12 months rolling devaluation dynamics slightly improved for the total REF Germany and office portfolio, but remains mixed for the office portfolios in the U.S. The average LTV increased slightly again from 55% to 56% in Q3. So overall, portfolio quality remains robust. The exposure at risk, i.e., the layered LTV down to 70%, increased in the third quarter. However, there have been no significant changes in the upper LTV layers above 80%, but rather in those at or below 70%, where another 30% devaluation this late in the cycle appears an onerous sensitivity to look at.
Let us now turn to the non-performing REF portfolio on page 14. Active NPL management enabled us to further reduce the number of NPLs in the third quarter, while registering a small increase in the volume to EUR 1.66 billion. Two additions with a volume of EUR 199 million, three reductions with a volume reduction of EUR 130 million. The new additions related to a U.S. office property financing and a German development loan in the land phase, the latter with a relatively high notional volume of EUR 108 million, but with no risk provisioning need. The reductions relate to one U.S. office and one U.K. office loan, as well as one development financing in Germany. Considering increased stage 3 loan loss provisions, the NPL coverage ratio increased from 24% to around 27% in Q3.
Let's take a look at the U.S. performing portfolio. Our focus here continues to be on risk reduction. In the third quarter, we saw further reduction of the portfolio by EUR 200 million. Since the beginning of the year, the U.S. performing portfolio has thus been reduced by EUR 1.2 billion to EUR 3.3 billion, which is primarily due to the portfolio transaction and repayments. Supported by our active NPL management, the U.S. NPL portfolio came slightly down in the third quarter to EUR 730 million. Here, one new office addition from the East Coast was met by one successfully restructured office case in Chicago. We also observed a partial repayment of EUR 23 million in LA, which is included in the column labeled FX / other effects.
Considering increased stage 3 loan loss provisions, the U.S. NPL coverage ratio has also increased to 25%, up from 19% per Q2. This brings me to the development portfolio on page 17. We significantly reduced our project development portfolio in the first nine months of the year by EUR 800 million. At the end of September, the volume totaled around EUR 2.4 billion. As already mentioned, we recorded a new addition to the NPL development portfolio in the third quarter. This is a development in the so-called land phase, for which no risk provisioning had to be recognized. In turn, one non-performing development loan in the land phase was repaid at book value. In terms of project progress, over 2/3 of the projects are either in the so-called land phase or in the completion phase. The net risk in these two phases is naturally lower. The remaining share of around 28% is attributed to projects in the construction phase, which still accounts for the majority of risk provisioning and remains the focus of risk management.
It is therefore also positive to mention that one NPL in the construction phase has migrated to the finishing phase. Just briefly looking at the German portfolio, we remain well diversified by regions and property types. LTVs continue to be moderate at 55%. The exposure at risk increase on the onerous 30% sensitivity interval has increased together with Stage 1 and 2 loan loss provisions, so that the respective coverage ratio has actually increased to about 32% in Q3. We continue to have no NPLs from German investment loans.
Actually, I can keep it short on the funding side on page 20. Our liquidity position remains strong with just under EUR 7 billion. Liquidity ratios still well above regulatory requirements. Given our active funding in 2024, we have no more need for wholesale funding in 2024, neither for Pfandbrief nor for unsecured. That said, we will of course remain a regular issuer of Pfandbrief and benchmark format, as well as private placements in different currencies when opportunities arise.
For 2025, we also plan for a green senior preferred benchmark. As already explained at the beginning, I'm on the next page with the deposits. After strong inflow in the first half of the year, retail deposits still exceed our needs. Therefore, we are focusing on optimization with an expected volume of around EUR 7.5 billion at year-end, which is unchanged to what we communicated at H1. Over 90% of our deposits are term deposits and sticky. So in the interest of NII, we can afford to be price conscious.
That brings me to funding costs on slide 22. Due to the pre-financing at the beginning of the year and our strong liquidity position, we were able to cope well with the volatility phase in February and March and avoided issuing during this period. Meanwhile, Pfandbrief spreads have tightened to pre-volatility levels, having enabled us to accelerate our funding activities in Q3 at manageable costs. After EUR 1.2 billion in the first half of the year, we issued another EUR 800 million in Q3 at affordable spreads. As mentioned, we are optimizing our retail deposits to our needs with a view on NII. After having cut interest rates twice in May by 100 basis points, we have now again lowered interest rates by 45 basis points in November, which brings us back to favorable cost levels of around Mid Swaps for our deposit funding. As mentioned by Kay, we remain solidly positioned on the capital side.
I'm on slide 23. You see the visualization of what Kay had explained. Even under the transitional calibration of risk rates to standardized parameters, we had a CET1 ratio of 14.5% at the end of September. This corresponds to an increase of 50 basis points compared to the first half of 2024. The pro forma Basel IV F-IRBA CET1 ratio increased to 17.3%. As mentioned, we have since received the expected approval for the actual application of Basel IV F-IRBA from the 1st of January 2025 onwards. To briefly sum it up, markets remain challenging and leave some uncertainties, especially with regard to the interest rate development. However, as of now, trade markets have reached the late cycle and start to bottom out.
We still expect the late cycle impacts in the fourth quarter, but based on the solid nine-month result, we currently see ourselves on track to reach our full year profit before tax guidance. Thank you very much for your interest. Kay Wolf and I are now looking forward to your questions.
Ladies and gentlemen, if you would like to ask a question, please press nine and star on your telephone keypad. In case you wish to withdraw a question, press nine and star a second time. The first question comes from Johannes Thormann at HSBC. Please go ahead with your question.
Good morning, everybody. Some questions from my side. First of all, regarding your new business, can you shed a bit more light on how you want to jump-start in Q4 from EUR 2.5 billion in the first nine months and then get to EUR 3 billion in just three months? That will be my first question. What kind of business you're targeting and if we should expect also deterioration of the margin in this context because you do higher volumes?
Secondly, I struggle to see the logic for PBB Invest. Of course, this is a new business segment, but it hasn't started in October, but earlier this year, and the fee income trajectory is rather disappointing. When do we have to see a better fee income? Should we expect a more hockey stick from this business for 2026 or so? So nothing to expect for 2025, for example, if you could elaborate on this. And last but not least, you talk about future-proofing your commercial real estate exposure. Years ago, you said hotels had no future. Now you're going into hotels.
Of course, hindsight is the smartest banker, but could you at least give some more reasons why you think this is now a better strategy? What is your target volume for U.S.? And probably also, you want to still do office. What are you talking in the office space? Thank you.
Thank you, Mr. Thormann, for your questions. And great to have you around again. Yeah. And also to all the others in the call. Let me answer your questions around new business, your first question. You're totally right that with regard to our target to get to EUR 5.5 billion, the fourth quarter will be a very important quarter. Answering your question, I would reiterate, and looking at the business development that we had also in 2023. The fourth quarter is always a very dynamic and intense quarter of the year.
So therefore, also last year in the fourth quarter, we had quite a substantial amount of new business being booked in that quarter. And therefore, the same dynamic we see for the fourth quarter this year. And on top of that, of course, we see the pipeline. Yeah. We are now in the middle of November. So therefore, we are very confident to reach that target. Yeah. Focus will be, and you have seen that in new business, also on extensions. We see our book, how it's developing, but there is also new business that is coming our way. But I would add, as you have asked for that, the key priority, as it was for the last nine months, is for us, not on volume, but on margin.
Therefore, with regard to our target on the EUR 5.5 billion that we have outlined, the focus is keeping the current level of margins up that we are showing. That is the key priority. I would then go to your third question as it refers to our real estate finance business. And yes, you are totally right. From hindsight, one could say we have kind of underestimated the dynamic post-COVID that in particular sits in an asset class like hotel. Yeah. But not talk about from hindsight. Let's look forward. And we see a consistent positive dynamic in the environment around hotels. And here in particular, our focus is on city hotels. Right? We don't want to go into luxury wellness hotel segment. It's the city hotels.
As we see a consistent trend, not only being business travel back up, but in particular, tourism traveling has been very consistent and strong, and certainly a post-COVID effect that people tend to travel more, doing more short-term trips, in particular to the normal tourist attractive key cities in Europe. And that will be a target, and we see a positive dynamic in that segment going forward. With regard to our U.S. book that you ask, strategically, we will adjust our U.S. portfolio downwards. You know that from a peak perspective, the U.S. book was at around 15% at one stage. We have already managed down our U.S. portfolio. And going forward with Strategy 2027, it will be further reduced to a maximum level of around 9%-10% going forward.
Overall, the portfolio composition on office, yeah, we outlined in the Capital Markets Day that we want to adjust downwards to around 40%, maybe 35%, depending on how the business dynamic is developing over the next three years. Our share of office that currently sits slightly below 50%. Yeah. We will continue to do office. We are also considering doing office in all our markets, but we will be very selective. We will downsize that in relative terms with regard to our new business, which then will lead to a much more diversified overall portfolio by 2027.
Coming to your last question around PBB Invest, we have set up a team. We have invested in that. We have created a product on the equity side as well as on the debt side. We have sounded out with roughly a hundred investors, in particular on the debt products over the last couple of weeks, and therefore we are very confident, Mr. Thormann, that we will soon be able to enter into real business. However, it has to be clearly said. The feedback of the investors, on the one hand side, really appreciating, in particular, our debt product, seeing the expertise and the rationale of us entering in that business, but also it's clear that from an investor perspective, they are all currently allocating their assets for 2025, so with regard to entering and showing real business, we have clearly included that in our plans for 2025, not for 2026.
Yeah, but that's the current status. Yeah, and we have very good feedback. We are very optimistic that we are getting this business going after we have done our investments, as we see that as a key pillar going forward for creating fee and commission income.
Okay. The next question is from Jochen Schmitt. Please go ahead with your question.
Thank you very much. Good morning. I have just one question, please. On your U.S. NPL portfolio, do you have an average vacancy ratio for the corresponding office properties? That's my question.
Thank you, Mr. Schmitt, for that question. We are not disclosing that granularity in sub-portfolios. So therefore, we have no figure included in that and would not disclose on that. But there is always a correlation of an NPL and a vacancy. Yeah. I think that is obvious. But we are not going to disclose that, Mr. Schmitt.
Thank you.
And the next question is from Borja Ramirez at Citi. Please go ahead with your question.
Hello. Good morning. Can you hear me?
Yes, we can hear you. Good morning.
Perfect. Good morning. Thank you very much for your time and for taking my questions. I have three questions, if I may, please. The first one is on the capital benefit. It's great to see the RB benefits. So congratulations. Investors are mentioning that for them and for the maximum long-term sustainability of the business model, they would prefer to see an acceleration of the provisioning and also to run down the NPLs because that is the nearest short-term point. And that would be most beneficial when speaking to the market. So if you could kindly provide some details on how you because that could potentially be one of the best uses of this new additional capital. So that would be my first question.
Then my second question would be on the operational metrics. So if you could kindly provide some details on your net interest income and your costs into 2025 because the net interest income was a bit below consensus. And for Q4, based on the range that you based on your guidance, it seems it could be either way. So maybe if you could elaborate on short-term NII for Q4 and 25. And then lastly, I saw that the average value decline in the U.S. portfolio is now only down 25% compared to, sorry, it's now 35% instead of 45% in the office NPLs. So if you could kindly elaborate on that. Thank you.
Thanks, Mr. Ramirez. I would take your first and third question, and then Marcus is going to answer on your second one. And maybe I start with your third one. We have started in the first quarter to consistently report a rolling development of valuations in our books across all the portfolios. And what you at the end see is, of course, there is always a difference between performing and non-performing with regard to the dynamic, but there is one consistency in the dynamic that we are reaching a bottom in the cycle. So with adding quarters and moving old quarters out, we see that the percentage point of value change is coming down, which is consistent to what we see and also say, yeah, that we are seeing a bottoming of the market. So our expectation is that that percentage, if we roll it even further forward, should further come down, yeah, as a reflection of where we see the current market developing.
With regard to your first question, thanks very much for your thank you and congratulations to that. And I'd like to stress, and I said that we are very pleased, yeah, that we have done the final step in concluding our transition into Foundation IRB approach and therefore very happy. With regard to our NPL management of that, we continue to manage our NPLs, actually plan A on a case-by-case basis. Yeah. When you see our reporting over the last couple of quarters, we have been able to consistently work out NPLs, yeah, in particular on the U.S. book. And we are at the moment, yeah, when you look at Q3, to a degree at a turning point as well, as we have been able, even for the first time in the U.S. book, to have a one-on-one exclusion, but we had also a paydown.
We have been able to really start running down the NPL book. As a senior lender, our view is that this is, for the shareholders and for the capital, the most value-preserving way of actively managing it. But, and there comes the but, we do not exclude consistently looking into more proactive sales on non-performing loans. That's still on our agenda. But at this point in time, value-preserving our NPL management as a senior lender is our key priority. We see our ability of making progress on a case-by-case basis. This is currently our plan A, but not ignoring the plan B, as said. We are consistently in the market and looking whether we see good value-preserving opportunities for potential more proactive sale of NPL. That has not been the case in the last two, three quarters.
But with changing market perception, there might open up opportunities, but it's way too early to talk about those.
And hand over to Marcus.
Yeah. No, thanks, Borja, for your question on NII. I mean, look, you're right. Of course, you saw a EUR 10 million reduction in the last quarter. And I explained the reasons. Essentially, the REF portfolio coming down, mainly as a result of the portfolio transaction in May. Of course, non-core is a driver here as well. But also funding costs, as I mentioned, as we had to roll over, we were avoiding the peaks, but we had to roll over, and of course, we're crystallizing some of the funding costs.
Now, looking forward, I think we, of course, work on 2027 and its implementation. And therefore, as you know, the focus is, as Kay had said, margin over volume. Namely also what we said at strategy day, capital efficiency, right, so that you get the maximum out of each unit of capital that you apply, both in capital but also in risk-adjusted terms. In total, that is how we want to drive, including the new asset classes that Kai repeated, NII prospectively also going into 2025. We are working therefore on the implementation of 2027 also with a view on 2025. For this year, we've kept the outlook, as you can see, for the total NII.
And for the future, I would also like to say that, of course, the composition of NII and NCI should also be supported by Strategy 2027, as we are not allocating only more efficient business into the REF portfolio, but as we are also starting to make progress on the investments that we are making to generate commission income, which, as you know, over time should move NCI in addition to NII. That will, of course, take lead time. So I think for the moment, you can expect that NII and NCI will be on the somewhat more moderate levels that you have seen in Q3 and then benefiting from the 2027 initiatives.
Thank you.
At the moment, there seem to be no further questions. If you would like to ask a question, please press 9 and star on your telephone keypad. There are no further questions. Handing back for closing remarks.
Yeah. Thank you very much. Not much to say as a closing remark other than big, big thank you for dialing in, joining us, listening to us, and of course, asking questions, so thanks very much. If there are any additional questions that might arise after the meeting, you know to reach out to Michael Heuber and the team over here. More than happy to provide more information if needed. Otherwise, thanks very much for dialing in. I wish you all a good day. Thank you.