Ladies and gentlemen, I would like to welcome you to our analyst and investor call. Thank you for taking the time to join us again. Together with my colleague, our CFO, Marcus Schulte, I will take you through the market and strategy update, as well as all the figures and facts for the first quarter of 2025. As always, unaudited, based on IFRS and for the group. As usual, we will then have plenty of time for your questions. Ladies and gentlemen, we can look back on a solid first quarter. Despite high volatility on the capital markets and a significant increase in geopolitical and macroeconomic uncertainty, we generated a pretax profit of EUR 28 million. This is only EUR 6 million below our Q1 2024, which was at that time positively impacted by a much higher roll of income from realizations.
It is well above the average of the previous quarters of 2024. However, it needs to be noted that the volatility on the U.S. market in particular is starting to have an impact. The economic environment in the United States is deteriorating significantly and at a rapid pace, and it is currently nearly impossible to provide a reliable outlook for the developments there. I will come to the specific implications of this for our core markets: Germany, Western and Central Europe, and the United States itself shortly. Let's stay with our most important figures for a moment. Our operating income declined overall compared to the first quarter of 2024 due to a significantly lower realization result and a lower real estate finance portfolio. Compared to the fourth quarter of 2024, though, it remained stable.
Net interest income is even slightly up despite a smaller real estate finance and non-core portfolio. This is the first visible sign of our strategic focus on profitability for our core business, real estate finance. This, in combination with a 13% decline in risk provisioning, is particularly pleasing. Let us now take a closer look at our assessment of the economy and the associated property markets, starting with our domestic markets in Germany. We are moving to page five. Even if it took a little time for the new government to be confirmed, we now have one. The coalition agreement certainly sheds light on the key plans. EUR 500 billion for infrastructure in Germany is a large package. It can also be expected to provide a tailwind for the property market. Other parameters, such as the IFO Business Climate Index, which has recently risen further, are also encouraging.
The small growth in GDP in Germany after last year's recession is also a first positive sign. The property markets in Germany, as we have also discussed several times with you in previous calls, appear to have bottomed out sustainably. Transactions and investor expectations are slowly but surely pointing in the right direction, upwards, albeit still at a low level. The trend towards quality in terms of assets and locations is clearly consolidating. If we look to Europe, we see a similar picture, which is, of course, much more diversified due to the different countries. Even at EU level, a small economic growth is developing after a phase of stagnation. The inflation rate is stabilizing within the ECB's target corridor, and economic indicators are pointing in an encouraging direction.
We are seeing a growing willingness in the member states to make targeted use of fiscal room to maneuver investments at national and at EU level. In conjunction with interest rate cuts by the ECB, this could and should further promote growth in the eurozone. Meanwhile, the European property market continues to diversify. Core assets in stable markets are benefiting, as we can see from the growing transaction volume and falling yields in the premium segment. Peripheral locations without ESG compliance continue to have a difficult time. The outlook? The majority of investors expect an increase in investment activity this year. Ladies and gentlemen, in the U.S., on the other hand, the picture is very different. From a 2.4% economic growth in the final quarter of 2024 to a 0.3% decline in the first quarter of 2025, such a change was not to be expected.
The U.S. markets are currently highly volatile, in parts under enormous pressure, and there is a high level of uncertainty among many market participants. A lack of continuity in the decisions made by the U.S. administration, a rather inconsistent trade and customs policy, and ongoing geopolitical tensions are hampering economic activity and have already damaged investors' confidence in some areas. The U.S. property market continues to be characterized by a high vacancy rate in the office segment, particularly on the West Coast. The abundance of larger spaces, primarily by the government tenants, which, to stress that, does not directly affect us at PBB, is, however, causing issues in the markets. A reliable outlook is virtually impossible. Added to this is a significantly higher risk of inflation rising again.
In a nutshell, the environment in the U.S. is much more difficult and unpredictable than we assumed in the second half of last year. To summarize, PBB continues to operate in a challenging and, in particular, in the U.S., volatile environment. We are quite successful managing through these circumstances as outlined, but we have to critically scrutinize all of our business activity almost daily and demonstrate a high degree of flexibility and agility. It would not be wise for us to assume this volatility, particularly in the U.S., to be only temporary. Let us now take a closer look at our progress in implementing Strategy 2027, how we manage and plan to manage through this market environment to stay on track. On the next page, over the past six months, we have been working hard to set course for the future of PBB.
As you may remember, we are diversifying our business model and our earnings base as part of our strategy to make the bank even more future-proof and profitable. Commercial real estate finance remains our backbone, and we are and will remain a senior secured lender. At the same time, we are systematically expanding our investment management and developing a service business for institutional commercial real estate investors, our new originate and cooperate business segment. In addition, we remain fully focused on increasing our efficiency and adapting our operating platform. Our overriding goal is and remains to increase our profitability, a return on tangible equity to over 8% despite all the current uncertainties, and to reduce the cost-income ratio to below 45% by the end of 2027. Where do we stand? Let me start with our real estate finance solutions business. We are making good progress.
We further reduced the risk provisioning requirements in our real estate finance portfolio in the first quarter. We have stabilized the volume of our portfolio at around 29%, our target figure. This is based on a new business of EUR 1.1 billion in the first quarter, up from EUR 0.7 billion in the first quarter of 2024. The average cost-interest margin in the new business has risen further to around 250 basis points, a figure that we did not expect and which we assume will reverse slightly in the coming months. The return on tangible equity for our new business is at around 9%. We have managed to achieve all of this in a very challenging market environment. Let me say that the PBB teams here have done a really good job. We have also created the basis for the planned further diversification of our real estate finance portfolio.
As part of our Strategy 2027, we want to invest more in currently underrepresented asset classes, such as hotels, and also in new asset classes, such as service and senior living. These asset classes now account for 15% of our deal pipeline, and the trend is still rising. This paves the way for profitable new business in line with our on-balance sheet business strategy in the course of 2025 and beyond. Let's now come to our off-balance sheet businesses. We have significantly expanded our network of investors and partners in our new business areas. Originate and cooperate has a good pipeline of deals, and we are currently working on several transactions. At PBB Invest, we are also making further progress in fundraising for our planned debt fund.
With currently more than 40 investors who have expressed their interest, we consider a first closing in the second half of 2025 to be realistic. On the next page, in order to further strengthen our existing business activity and expand our new business areas in the best possible way, we will significantly reshape our organizational structure. In the future, there will be two sales divisions: Real Estate Finance Solutions, headed by Thomas Köntgen, and Real Estate Investment Solutions, headed by Pamela Heuber. We are also strengthening our CRO division, which Jörn Joseph will take over on June 1, and expanding the responsibility of our CFO division. The new structure will be leaner. Among other things, we are reducing the number of senior managers by 15% and thus creating prerequisites for the potential of further cost measures.
We are streamlining our processes and focusing even more strongly on our customers, as well as partners and investors of our new businesses. Another way to foster efficiency is our new production hub in Madrid. There, we plan to install around 85 positions that take over parts of the bank's corporate functions and in dedicated teams. The first 10 positions have already been filled, and we are well on track in executing our already announced cost measures, overachieving on the non-personal side as we successfully transform our IT infrastructure. Also, we substantially reduced office space by 27% in three key locations alone. We expect this to result in a much more efficient and effective bank that continues to maintain a strict cost discipline. All in all, our cost trajectory remains on track for the guided cost-income ratio of 15% for 2025.
Thanks to our continued solid capital and liquidity position, we also have good room to maneuver in implementing our strategy. However, it is also clear that while, as we have seen, the economic situation in Germany and Europe is stabilizing, we are seeing considerable volatility in the U.S., our second largest market in terms of the current portfolio. Under the new administration, uncertainties have increased to an unprecedented extent and have already led to a significant slump in economic output and investment activity. The medium and long-term prospects here are currently highly uncertain. When we developed our Strategy 2027, the world was a different place. A prerequisite for our business activities is the stability of economic and political conditions. In our view, neither is currently the case in the U.S.
In Europe, on the other hand, there is a much higher level of confidence in the outlook, albeit currently with weak overall economic growth, and property markets that display clear signs to have bottomed out. It is also here in Europe that we are making good progress in our strategic transformation. Against this backdrop, we currently see no sustainable basis for new business in the whole of the U.S. property market and have decided to review all options for our existing U.S. business. This is because we want and need to focus our strength on the markets and business areas that are most promising and sustainable for us in the future. In view of the significant change in the macroeconomic environment in the U.S., we are also reviewing the timing of our planned share buyback program. Once we have completed this, we will communicate more details.
Ladies and gentlemen, with this update on the status of the implementation of our Strategy 2027, I would like to hand over to Marcus for the deep dive on our figures.
Thank you very much, Kay, and good morning also from my side. Let me start with two general remarks. First quarter results fully reflect the conscious structural choices we've made in 2024 to support our path towards 2027. I.e., they reflect the decisions to de-risk the portfolio and to focus on profitability. They show we are on the right track. At the same time, the ongoing bottoming out of real estate markets also shows in PBB's portfolio. With stabilizing portfolio KPIs, stabilized or even slightly reduced NPLs at lower risk costs. All in all, these are developments in the right direction.
However, as Kay mentioned, at the same time, overall political, economic, trade, and monetary uncertainties and volatility affect the current market sentiment and outlook, especially in the U.S. With that said, let's start, as usual, with a brief overview of the key operating and financial developments in the first quarter. On slide 11, the revenue business, including extensions of more than one year, rose significantly by EUR 400 million year- over- year to EUR 1.1 billion. This increase of more than 50% is even more remarkable when considering our selective approach with focus on profitability. The average cost-interest margin rose to around 250 basis points in the first quarter of 2025, which is roughly five basis points higher than in Q1 last year and 10 basis points higher than in Q4 and full year 2024.
As Kay already mentioned, with around 9% return on equity, our Q1 new business played into our Strategy 2027, where we targeted an overall return on equity of 8% before tax. This reiterates our commitment to higher profitability. Just to round off our new business, a reminder that volume-wise, the fourth quarter is generally not comparable, as it is seasonally always the strongest quarter of each year. Also, in line with our 2027 Strategy, direct portfolio remained virtually stable, just below our targeted EUR 29 billion. As a consequence of the increase in new business margin, also the portfolio margin was further up. That said, year- over- year, the revenue portfolio was down EUR 2.3 billion as a reflection of our active portfolio management and de-risking and our more selective new business approach.
The non-core portfolio is only slightly down by EUR 100 million to EUR 9.6 billion in the first quarter, driven just by regular maturities as we did not actively pursue any asset reduction and liability buyback measures. However, we will continue our value-preserving optimization, but rundown of the non-core portfolio will likely be at a lower pace than in 2024. Retail deposits developed in line with what we have guided, i.e., they are slightly down from year-end level to EUR 7.3 billion per Q1. We expect them to remain around those levels. Moving to slide 12. As a consequence of consciously managed portfolio volume and lower extraordinary income, our operating income level came down from previous year's highs. However, with new business choices we are now making, we are on the way to better profitability towards 2027. Also, over quarter, the revenue portfolio volume stabilized at the target level.
In Q1, we show a virtually stable top line of EUR 180 million compared to EUR 119 million in Q4 2024, with NII and NCI even slightly higher at EUR 109 million. In line with what we have guided, general and administrative expenses are significantly down quarter over quarter from EUR 66 million to EUR 59 million. This is down to the completion of our IT transformation, while investments into our Strategy 2027 are ongoing and on track. In line with overall stabilizing trade markets and as expected, the risk costs came down significantly year- over- year and also quarter on quarter to EUR 26 million, down 45% compared to Q1 last year and 13% compared to Q4 2024. In summary, VTEC profit is down from previous year, but significantly up by EUR 11 million compared to the previous quarter due to better operating expenses and risk costs, while operating income stabilized.
This brings me to our usual deep dive into our operating income and expenses on slide 13. Operating income at EUR 118 million was virtually stable quarter over quarter, with NII and NCI, and to be more precise, NII being even up by EUR 1 million, as an increased portfolio margin compensated for the slightly lower portfolio volume in revenue and non-core. As mentioned, there were no asset reduction and liability buyback measures in the first quarter, so that realization income was down by EUR 20 million compared to previous quarters. On the other hand, other income, including the fair value result, was mean reverting up by EUR 18 million quarter- over- quarter and thus largely compensating for the lower realization income. As already touched upon, we continue to actively manage operating expenses, which are down EUR 8 million quarter- over- quarter. Non-personal expenses are substantially down by EUR 9 million quarter- over- quarter.
Our IT transformation requiring parallel run of our IT setup in the second half of 2024 had been completed successfully as envisaged. With temporary double cost in H2 falling away, we are now benefiting from structurally lower cost base of a modernized IT setup. Inflationary cost pressures have been successfully managed, with personnel expenses only having marginally up. Improved cost income ratio of 54% reflects the transition to the guided 50% for 2025. In line with our cost deep dive in Q4, our revenue business is already close to our target cost income ratio of 45%, while strategic investments into the new Real Estate Investment Solutions business still holds up the overall cost income ratio during the transition to 2027.
All in all, this results in a pre-provision profit of EUR 54 million, which is, for the reasons explained, down from the EUR 81 million in the previous year, but up EUR 7 million or 15% quarter- over- quarter based on stabilized operating income and lower expenses. This brings me to risk costs. Actually, I can keep it rather short this time on slide 14. As a reflection of bottoming out real estate markets, costs are further down, risk costs are further down by EUR 26 million. This is down by EUR 21 million or 45% year- over- year and EUR 4 million or 13% quarter over quarter. In stage one and two, EUR 5 million were released in Q1, mainly resulting from reduction of the remaining term of loans.
At the same time, there were EUR 31 million additions in stage three, solely relating to existing NPL cases, where the additional need for U.S. office and German development cases decreased compared to previous quarters. There was no stage three additions from the one new NPL case in Germany. On slide 15, you see that in line with the development of risk costs, the stock of loss allowances was only moderately up by EUR 21 million quarter over quarter. In line with risk cost trends, stage one and two loss allowances were moderately down by EUR 8 million, and stage three was up by EUR 29 million. In the interest of time, I would leave it here, and that would bring me to the portfolio business. Before I go into the selective deep dive, I would like to update you on the portfolio summary we showed you last time.
Slide 17 shows the development of two key risk parameters in our performing revenue portfolio, for the total revenue portfolio and for the U.S. office portfolio. First, in both total revenue portfolio as well as the U.S. office portfolio, the average LTVs have continued to stabilize. Stable 56% in the revenue portfolio, more or less stable 70% in the U.S. office portfolio. Second, the valuation adjustments on a rolling 12-month basis have further improved for the total revenue portfolio and were stable for the U.S. office portfolio. This was an improvement to minus 4% average 12-month rolling valuation adjustment for the total revenue portfolio and stable minus 7% for the U.S. office portfolio. That minus 7% was, however, solely driven by FX in Q1 2025, so there was an underlying improvement in the U.S. office portfolio as well.
All in all, these indicators continue to support the argument of a bottoming out cycle and give good proof that the stabilizing risk dynamics in the trade markets also find their reflection in PBB's portfolio. In this context, please let me also mention here that another key risk metric we've been showing for more than a year now is also stabilizing across markets. Exposure at risk in the total revenue portfolio, as well as in all sub-portfolios, i.e., for the U.S., Germany, office, etc., have hardly changed compared to year-end. For that reason and in the interest of efficiency, we moved all of the usual performing portfolio market-by-market analysis to the appendix. Let me reiterate, all the information previously shown can be found there as usual. For today's deep dives, I will therefore focus solely on the NPL and the development portfolios.
The NPL volume on slide 18 is marginally down by EUR 16 million to EUR 1.887 billion in the first quarter 2025. There was only one addition of EUR 57 million German office loans, which did not require stage three risk provisioning, as mentioned. This was more than offset by four NPL reductions of EUR 40 million in Germany and positive FX effects of EUR 33 million, mainly driven by the U.S. dollar. However, in light of the aforementioned volatility and uncertainties, previously targeted further reductions in the U.S. NPL portfolio have been delayed so far. That said, we continue to show separately the three economically healed deals with a volume of nearly EUR 200 million, which relate to three U.S. property loans that were restructured in Q4 2024. Also, these have been economically healed. They cannot be yet recognized as regulatory NPL reductions and thus remain in probation until year-end.
Briefly on the development portfolio on slide 19. The total risk profile continued to improve with the development portfolio volume further down by 10% or EUR 200 million to EUR 2 billion. In the same vein, the shares of land and construction phase are down by one percentage point each, while the share in the less risky finishing phase increased by one percentage point. Furthermore, the NPL has been managed down, also in that portfolio, by EUR 38 million to EUR 650 million, as two of the aforementioned four NPL reductions in Germany were developments. There were no new development NPLs. Just to mention again, even though we did not do any new business financings in developments in Q1, development financing will continue to be part of our product range, although we will pursue an extremely selective approach here. That would lead me over to the funding and liquidity side on slide 21.
All in all, we continue to pursue a balanced funding strategy with a highly resilient Pfandbrief as the dominant source of funding and a balanced funding mix of retail deposits and wholesale unsecured funding. Liquidity remains comfortable across all metrics. All in all, we put a higher focus on optimization and cost efficiency. Worthwhile to mention again in this context, S&P has raised its rating outlook to stable after full year results on March 25 this year. This, amongst other, also recognizes PBB stabilized asset quality, solid capitalization, as well as resilient funding and liquidity. A few brief comments on how we've fared in credit markets on slide 22. The two left charts reiterate the Pfandbrief's resilience, which supports both refinancing as such, but also NII stability.
Year-to-date, secondary spread significantly tightened by over 20 basis points despite EUR 1.1 billion issuance of Pfandbrief since the beginning of the year. Our successful four times oversubscribed EUR 750 million benchmark issued in January supported both absolute and relative performance of our Pfandbrief spreads. Unsecured spreads on the right reflect the more volatile market environment, but the balanced mix of wholesale and retail funding helps anchoring unsecured funding costs on moderate needs. This brings me to my last slide on capital. We are on slide 24. As you know, since the beginning of the year, we are in the Basel IV F-IRB world, for which we have guided a CET1 ratio of at least 15.5% for year-end 2025. As of first quarter end, we exactly land at 15.5% with the CET1 ratio, up from 14.4% at year-end, where risk parameters were still calibrated towards standardized parameters.
This increase of the CET1 ratio reflects an RWA reduction of EUR 2.7 million. At the same time, the capital position was negatively affected by the expected loss shortfall, which is now again to be deducted under F-IRB. With rising capital ratios, the already substantial buffer to MDA increased because of capital metrics. However, compared to the year-end pro forma Basel IV F-IRB CET1 ratio, the Q1 ratio of 15.5% is down by 130 basis points. This decrease is more than anticipated and a reflection of overall increased market volatility and uncertainties, which transpired both into the denominator and the numerator. First, RWAs under Basel IV F-IRB, pro forma at year-end and actual for Q1, increased, mainly due to internal rating downgrades reflecting market developments and uncertainties, as well as other effects, including model adjustments.
Second, the expected loss shortfall increased accordingly, with negative effect on the capital positions. Even though the market environment remains highly uncertain and volatile, we stick to our through-the-cycle CET1 ambition level of at least 14%. With that, I would hand back to Kay.
Thank you, Marcus. Before we open up for your questions, please allow me to summarize the key points of today's presentation on page 26. First, we delivered a solid quarterly result, particularly in our core business. We have achieved first visible successes in increasing our profitability. We have significantly reduced our cost of risk. The property markets in Europe and Germany are continuing to stabilize. We are making good progress in implementing our strategy, with success in our two business divisions and with the implementation of a more efficient target operating model.
Second, we, however, are confronted with a substantially changed environment in the U.S. The high volatility and uncertainty have not allowed us to provide new commitments there. It would not be wise for us to just assume business as usual, but to review all options for our existing U.S. business, as well as the timing of our planned share buyback. Third, we nevertheless continue to drive forward our strategic goals to increase profitability and diversification, despite all those current existing uncertainties on the market. Last but not least, for 2024, we propose the cash dividend of EUR 0.15 per share at the upcoming annual general meeting on June 5th. Ladies and gentlemen, thank you very much for your attention. Marcus and I are now looking forward to your questions.
Ladies and gentlemen, we come now to your questions.
If you would like to ask a question, please press 9, followed by the star key on your telephone keypad. If you wish to cancel your question, please press 3, followed by the star key. Please press 9 star now to state your question. The first question comes from Johannes Thormann, HSBC. Please go ahead.
Morning, everybody. Some questions from my side. First of all, in your new business, do you expect the same margin decline as in 2024 over the next quarters in basis point terms? What is actually behind the new business in other regions? Can you elaborate a bit more? Secondly, on your NPLs, you initially talked about a very positive picture for Germany at the beginning of this presentation, but still the only NPL is in Germany, in German office. Is this a single case? Can you provide probably more details?
What has caused this NPL? And next, what are the benefits of a production hub in Madrid? Why did you choose Madrid? Thank you.
Yeah, Mr. Thormann, thanks very much. Morning to you. With regard to your questions, first of all, around the new business, with 250 basis points of gross interest margin, we really have overexceeded our own expectation. Yeah, with regard to the further development, I think when you look at last year's, it was kind of coming down towards 240 in the fourth quarter and overall in the portfolio. And we would expect that to be the direction of travel. Yeah, so no significant drop, but a gradually movement towards more what we expected in our own plans. With regard to the new business, it's totally focused on Germany and on our European markets. We haven't done any new business around it. We've had some highlights.
There are EUR 130 million of new business made in Spain. In our European markets, there is EUR 100 million also with international clients, with assets that we communicated about, I think also publicly in Italy. There is EUR 100 million in Austria. You see, when it comes to our new business that we executed in the first quarter, it is really in our core markets, not only Germany, but also in the international Western European markets, where particularly economically, we see the stability that is needed to enter into long-term good transactions. On the NPL, I mean, Mr. Thormann, you know we are providing a hell of a lot of transparency right down to individual transactions. It is only one. It is an idiosyncratic case, and I would abstain from commenting and making any more and providing any more details on literally one single case.
Last but not least, your question on the production hub, a very strategic component for us in terms of broadening out, first of all, the international footprint of the bank. You asked why it is Madrid. The answer is short because the bank itself is acting in the Spanish market. We are present in Madrid, so we know the market. The second reason is we analyze intensively and we see great opportunities there in the labor market, diversifying our base of operations that is currently focused in Garching and Eschborn. It is really a diversification. It provides us good access to an interesting pool of talent that is in Madrid.
With the speed that we have been able to ramp it up, as we have already brought in 10 people into the bank in Madrid out of the 85 in a short period of time, it is underpinning the ability that we have there.
We come to the next question from Borja Ramirez from Citigroup.
Hello, good morning. Can you hear me?
Yes, we can hear you.
Perfect. Thank you very much for your time and for taking my questions. I have two. My first question is regarding the U.S. If you could kindly provide details on the risk-weighted assets in your U.S. business and also how much of the U.S. loans are in your covered bond pool. That would be my first question. My second question would be if you could kindly provide a bit more color on the rating migration.
What assets and regions and also if it could have any impact on the over-collateralization of the covered bond pool? Thank you.
I would. Thanks, Mr. Ramirez. Good talking to you. I would hand over, Marcus, if you are going to take the question, otherwise I would have started with the second one.
Y eah. Basically, hi, Borja. Good to hear you. On the U.S. and covered bonds, I mean, generally speaking, I think the answer that I was always giving to that holds, which is at the end of the day, the cover pool is a reflection of our overall loan book. That means that, roughly speaking, not having the precise figures at my fingertips, but roughly speaking, the U.S. share would be similar to the share that it has in the overall portfolio, and that will not have changed.
In terms of the, and that is right because I'm being shown that it is, what is it, Michael, 13%. It is in line, as I said, 14% portfolio, 13% in the cover pool, as I said, exactly in line with the overall portfolio. In terms of your question on RWA, EUR 2.4 billion are RWA in the U.S., often mentioned figures. Of course, they had also an uplift given the volatility and the market uncertainties compared to the performer that you saw in full year. EUR 2.4 billion and increased probably slightly overproportionately.
I would add and pay your attention to page 49 of the deck as well, where you see on the overall portfolio, the rating migration in terms of the internal rating classes of the expected loss. Yeah, you see the migration towards sub-investment grade ratings, reflected primarily also the uncertainty in the U.S.
Yeah, that is one of the key drivers of that. I would add next to, boy, and you know that the RWA in itself, with the foundation approach, the expected loss shortfall is also returning into capital. Yeah, the rating migrations on the one hand side are driving up. Marcus mentioned that in his speech, the RWA, but they are also driving up the expected loss and both are a reflection of capital trajectory.
Thank you. Very clear.
The next question comes from Tobias Lukasz, Kepler Cheuvreux. Your line is open.
Yes, good morning. Also a couple of questions from my side. Firstly, on the statement of the high volatility and the uncertainty in the U.S. market and the fact that it triggered the review of the U.S. business. So far, you have not done new business, basically just prolongations.
I was wondering if that means that we are close to an exit. If there was an exit, would you have a number for us, what that might cost? Secondly, why does it impact the share buyback? It is a EUR 15 million kind of 2% yield. Why is this being questioned? Still at a 15.5% CET1 ratio. Secondly, on the NAI, you said it is slightly up and you also mentioned the positive NIM. As far as we are in Q2, so half of Q2, you have seen, is that trend basically confirmed that we can think of an increasing NAI number? On the risk costs, I was just wondering how come that you show higher stage three provisions in the first quarter? Usually, you have Q4 running quite into February, even March.
How come that now you have this U.K., some other regions which are very strong in Q1? Is that a trend we should consider going forward? Maybe lastly, on the realization gains, you said that there were no asset sales, basically, and no liquidity buyback measures. How should we here think about the coming quarters, so the whole 2025, since this was the main driver basically last year and the year before? Thank you.
Thanks very much, Mr. Lukasz. I would split, yeah, I think the four questions between Marcus and myself. I would take care of the first and the third, and Marcus covers second and third. I think your first question was around review of our U.S. business and what has triggered it.
Yeah, I think to reflect on what we communicated at Capital Markets Day in October at that time, we already said that we want to focus our business in the U.S. even more onto the East Coast. Yeah, so therefore, at that time, we already concluded that overall, we want to reduce our presence in the U.S. We gave a direction of travel of definitely below 10% in the portfolio. And we concluded at that time that it is wise for us to stay in the East Coast, markets Boston, New York, and Washington. Yeah, look, at that time, it was a completely different macroeconomic environment. We have seen growth in the U.S. at that time. We had a good momentum economically, and all forecasts were positively reflecting.
That gave us the confidence that the markets are going to recover, in particular on the East Coast side, and to stay there. It also gave us the confidence that we can gradually exit all the other markets that we highlighted. Now, the key driver for making the review is that this economic assumption has literally completely changed. Yeah, when you see where the U.S. economy is trending right now with a very rapid development, it is not something that kind of comes over time and you can adjust to it. Yeah, we see quite a high volatility with rapid impacts to investor sentiments and investment activities in the U.S. That is the key driver of saying you cannot just continue as business as usual. We should have a careful look whether our assumptions made at the time, and they refer to both elements.
What kind of new business we are doing and how do we consider dealing with the existing portfolios in all of the markets, we need to take a review. Yeah, I do not want to speculate too much because we are in the middle of doing this analysis of what the outcome will be. I wanted to highlight that those have been the key driver. This volatility, as we just talked about capital as well, we have seen this volatility in our portfolio. We do not see additional COPs that have seen that in the portfolio. The de-risking that we have done so far pays off, but the outlook has changed. That is why we are doing the review and will consider effects on it. I would jump probably to your third question on risk costs.
First of all, I think the trajectory that we are showing for the overall risk costs remains stable. Yeah, we always said that we expect gradually overall risk costs are coming down. You are highlighting on Q3, and there is literally one case in Q3 that represents a third of the overall risk provisioning that has happened post-financial year closing. Yeah, if you would take that out or just looking at stage three, you would see a different trend. So it is really one case that came in. You see that under the buckets other, it was a Western European case. By the way, an already existing non-performing loan where unfortunately a decision made by a local authority impacted our value assessment and the strategy that the investor had on the assets. Yeah, not going deeper into it, yeah, called it an idiosyncratic event.
That's why your general trend that you have highlighted for the first quarter is literally slightly broken, let's call it that way. I would,
Yeah. Hello, Lukasz. I would then take number two and four. Look, I think at the end of the day with Q1, you saw already that the boat is slightly turning. It's, of course, a big portfolio. The new business production that we have has been highly accretive to the bottom line. We mentioned that. In terms of NII, we saw that the portfolio margin, which has been increasing, was overcompensating a still slightly falling ref book. Of course, from here, we stick to our view on where new business would be for the year. Therefore, we expect that we will continue to write new business. Of course, margins will have to be defended here.
I think we are on the right track there. Also with the composition of the new business that Kay mentioned, including the new asset classes which start to take hold. Of course, any business that we do not do in the U.S. will have to be compensated in other markets. The RWA density that is being released there would be, of course, deployed to other markets if business is not being done there. There would be substitution effects. On the cost and I cost line, I think for the first quarter, we also had some tailwind for the first time in a longer time as far as funding costs are concerned. We have been running fast again in terms of pre-funding, but spreads have been coming down. There was already a moderate tailwind in Q1. I do not know how the world is developing, right?
I am talking about the base scenario. There are, of course, other scenarios, but I currently see that our spreads continue to stabilize, namely on the Pfandbrief side. We have moderate needs on the unsecured side. We can optimize our deposit base, which we have been doing. In a base scenario, I also see some support there. That would bring us to what we have guided for the year in terms of acceleration here. We have been doing also important. It is not your question, but I think it is always important to see it in context. With the initiatives that we have on the off-balance sheet income items taking hold, Kay addressed that in his speech, I think in quite some detail. We expect that also NCI would gradually start to kick in, which should also help.
In terms of realization income, look, I mean, 2024 was, as you know, extraordinarily supported with realization income from non-core sales and, according, if you wish, liability buybacks, roughly EUR 20 million a quarter. We did not continue that exercise in Q1, but there were other counterbalancing effects that I described in the other income lines. I would not expect that realization income is coming anywhere near to the quarter production that we had in 2024. However, as I said on the previous call, as the cycle bottoms out, gradually recovers, we would see that the other components of the realization income, meaning prepayments from our ref clients, gradually start to kick in so that we would see some stabilization of realization income. I would expect it to be lower than we saw in peak times last year.
Ladies and gentlemen, if you have further questions, please press nine, followed by the star key to state your question. The next question comes from Andreas Pläsier, Warburg Research.
Yeah, good morning, gentlemen. I have two questions. One follow-up regarding NII. The EUR 5 million NII contribution for non-core business, should we assume this is a run rate for the next quarters? The second question is regarding the new business. You gave a guidance of EUR 6 billion-EUR 7 billion new business, including U.S. How large is the portion of the U.S. business and has the stop of U.S. new business an impact on the gross margin expectation in this year? Thank you.
Thanks very much, Mr. Pläsier. Good to hear you. Let me probably start with the second part of the question.
The new business in the U.S., the way we planned it, given that our strategic direction was to gradually reduce our overall book, yeah, when you remember our communication at Capital Markets Day, it would be low 10%. Yeah, we can consider then the new business volume that we planned there on the East Coast to be in that range, yeah, because otherwise you can't reduce the overall portfolio. The intention clearly is, given that we haven't done any new business in the U.S., yeah, to reallocate that business potential to other markets. Yeah, when you look at our new business volume in the first quarter, the EUR 1.1 billion, yeah, coming literally out of our core markets, Germany and Western Europe, provides us with sufficient ability to generate positive returns.
You see that not having done a deal in the U.S. has not hampered us producing what is really a very strong cross-interest revenue, cross-interest margin. Therefore, we see and will work towards compensating for not doing business in the US, as we had to do in the first quarter already, to compensate that with other business and other markets.
Okay.
Hallo, Plesier, [Foreign language] . On your second question, or actually your first, I think these are always communicating tubes, right? At the end of the day, we chose to sell no non-core assets and buy back the according liabilities in Q1. As a result of that, of course, the non-core portfolio has only shrunk, as you saw, by EUR 100 million. It has rather been staying stable, which, of course, on the flip side, supports NII.
Given that I said we expect the non-core sales and liability buybacks to happen where they make sense, they would clearly be at a lower volume than in 2024. Therefore, it means that where we have less realization income, it somehow supports, of course, the NII because the assets stay on balance sheet. That said, of course, you know that our non-core book, namely the PIF book, is having a relatively strong maturity cluster in 2027. I would have thought that even if we did hypothetically no sales of assets in non-core or buyback of liabilities at all, then in 2027, you would see that portfolio come down more sharply by natural maturities, which are clustered in that maturity.
Okay.
The next follow-up question is from Tobias Lukasz. Tobias Lukasz, Kepler Cheuvreux.
Yes, thank you.
I wanted to touch again on the share buyback, the timing of the share buyback. Why has this put into question? Could you please elaborate on what we should expect going forward? Thank you.
Yeah, thanks for the question. Look, we remain committed to the share buyback, yeah, to say that upfront. I think what we said is that with regard to review of our U.S. business, and yeah, not to forget, it is the second largest portfolio that we have, we wanted to also highlight that we are going to review what is the right timing for share buyback. Yeah, and that is literally what we are communicating. We remain committed. It is of importance for us, considering the volatility in the markets, that we remain committed to our capital targets and what we have communicated and that is unchanged.
Thank you.
Thank you very much for your questions.
We close now the Q&A session. Back to your host, Kay Wolf. Thank you very much. Thanks for dialing in. Thanks for the question. If there is anything more, yeah, in terms of questions that might come up, yeah, Michael Heuber, Axel Leupold are available to you. Yeah, and I wish you all, I think, in the areas, sunny rest of the day. Thanks for dialing.