Good morning, ladies and gentlemen, and welcome to the Deutsche Pfandbriefbank AG Analyst Call regarding its results for the third quarter 2025. 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. Please go ahead.
Thank you very much. Ladies and gentlemen, I would like also very much to welcome you to our analyst call this morning. Thanks very much for taking the time of joining us. As usual, I have my colleague, Marcus Schulte, with me. Our CFO and I, we will guide you through the bank's most important developments and the key figures for the group under IFRS. As always, there will be plenty of time at the end for your questions. Ladies and gentlemen, for pbb, 2025 is a year of intense transformation, marked by far-reaching strategic decisions. We are systematically reshaping the bank to make it more profitable, more diversified, and more resilient. Our strategy 2027 remains our guiding principle. We are undoubtedly making progress, but we are still operating in a market environment that, although it has stabilized, is still struggling to gain momentum.
The current market is lagging behind our expectations, and as the EXPO REAL Estate Fair at the beginning of October showed, also behind the expectations of many other market participants. Before I come back to the market developments, let me briefly discuss the most important strategic developments at pbb on page three. We are continuing to pursue our strategy 2027, but we are not yet where we want to be. Our new business in commercial real estate financing is growing significantly and profitably. After nine months, our key metric, return on tangible equity, stands at around 9%. The profitability of new business, therefore, remains very good and exceeds our targets for 2027. We are also making progress in building up our real estate investment solutions business. The acquisition of Deutsche Investment Group is expected to close in the first quarter of 2026.
All regulatory approvals have been granted, and preparations for the integration of the group are in full swing. The diversification of pbb towards more commission income is therefore also on track. We are making progress with the implementation of the exit from the U.S. market, which was decided in the second quarter. We presented a toolbox we intend to use to reduce, respectively, to protect the portfolio. Our aim is to reduce risks, strengthen our resilience, and deploy our capital more effectively for pbb in the future. However, the transformation of our financing portfolio towards higher quality and profitability currently comes at a price. We are generating profitable new business, and with EUR 4 billion in the first nine months, a strong growth of more than 60%, also significantly more than in the previous year.
However, with our full focus on Europe, this business cannot yet fully compensate for the still shrinking real estate finance portfolio. This is mainly driven by the de-risking measures in our U.S. and development portfolio. We plan to continue to focus on these portfolio measures for the rest of the year. Despite all the progress made in terms of strategy and de-risking, we cannot be satisfied with a nine-month result before tax of EUR -235 million, which corresponds to EUR 97 million adjusted for the one-off effect of the planned U.S. exit. The market remains challenging, with lower-than-expected transaction volume and strong demand for attractive transactions. We continue to have costs well under control. Despite intense ongoing restructuring of the organization and of our portfolio, we were able to reduce operating expenses compared to the previous year.
At the same time, we remain very well equipped with capital and liquidity. Let me take this opportunity to talk about markets in more detail on page four. As I mentioned, the property market in Germany and Europe are not really gaining momentum. Many market participants, including ourselves, expected to see more transactions at this point in time. That is not the case. Although Europe and Germany are proving stability in challenging economic times, growth remains marginal. No GDP growth in Germany and 0.2% in the EU , at least at this level, considering the continuing burden of the U.S. tariff policy, Chinese trade restrictions, and the global environment that remains very fragile overall. Inflation currently seems to remain manageable at 2.1% within the target corridor of ECB, which allows for a normalized, slightly loosened monetary policy.
Yields on European government bonds are likely to rise, which could indicate falling interest rates. However, we do not expect this to happen this year. The commercial property market in Europe remains challenging. We are seeing slight improvements and an increase in transactions at a low, not to say very low, level. To be clear, the mood in the market remains subdued. Buyers and sellers continue to act hesitantly. Overall, we are observing stability, but market growth is still well below our expectations. Looking ahead, the quarter's market environment is likely to continue in the fourth quarter. Yield compression is limited by the current interest rate environment. Quality remains a key factor, while existing properties in poor location and with poor amenities, or ongoing development projects in more difficult circumstances, continue to struggle.
No wonder there is intense competition for a small number of very good assets or development projects. Ladies and gentlemen, as I have already mentioned, Strategy 2027, as shown on page five, remains the guiding principle for our actions. We are investing in this strategy and consequently driving the transformation of pbb forward. We are making progress in all three pillars. In our core business, real estate finance solutions, we are diversifying the composition of our portfolio and focus clearly on profitability. In the real estate investment solution segment, we will take a major step forward with the closing of the acquisition and integration of Deutsche Investment Group. We expect this to contribute significantly to the capital-efficient diversification of our earnings. We are continuing to build a leaner organization with a target operating model that promotes our strategic goals while maintaining strict cost discipline at all times.
The development of our hub in Madrid is continuing, and we have opened a branch in Amsterdam. These are all investments that contribute to our goal of building a profitable and diversified European bank. We intend to conclude the key agreements on our organizational restructuring by the end of the year. A profound transformation in just a few months. Let me now take a closer look at real estate finance solution, our core business, the financing of commercial real estate, on page six. Ladies and gentlemen, new business volume grew by more than 60% compared to the same period last year and amounts to EUR 4 billion. However, as already mentioned, market growth is currently falling short of expectations, and we cannot completely escape this trend. We therefore now expect new business volume for the year 2025 to be between EUR 5.5 billion and EUR 6 billion.
We expect the financing portfolio to be between EUR 27.5 billion and EUR 28 billion. I mentioned that we are not yet able to fully compensate for the decline in our portfolio. In this regard, we must intensify our efforts in what are undoubtedly challenging markets to achieve our target portfolio volume of EUR 29 billion without compromising on profitability and quality of financings. Our growth asset classes now account for 7% of our new business in the first nine months. We are gradually moving from pipeline, which continues to show around 20% in these growth asset classes, to implementation. This share of new business is expected to grow further, while the office share will continue to decline.
Our cross-interest margin is at a consistently high level of around 230 basis points, and our return on tangible equity in new business remains strong at 9%, above our target of 8% for the whole bank. Let us take a brief look at the status of the U.S. exit on page seven. We made further progress in exiting the U.S. real estate market in the third quarter of the year. The performing portfolio has already been reduced to EUR 2.6 billion. At the top right of the slide, you can see how the reduction would be expected to proceed without further measures. We are anything but inactive. We are working with the toolbox of hedging transactions, sales, and wind-downs. Currently, we continue to actively explore the market for an accelerated reduction of risk hedging for a portfolio of up to EUR 2 billion in the performing book.
We saw no further reduction in the non-performing book in the third quarter. The portfolio now stands at around EUR 1 billion. Here, we are focusing on wind-down and sale of loans. We have already initiated both of these measures and are confident that we will make progress by the end of the year. This mix of measures should significantly accelerate the U.S. exit over the next month, further shrink the portfolio, and consistently reduce risk. Moving to page eight and our second pillar, real estate investment solutions. The focus is on closing the acquisition of Deutsche Investment. All regulatory approvals are now granted. We are already working on a joint project to prepare for the integration of Deutsche Investment into pbb invest, so that we are operationally ready for day one after closing.
This is an extremely encouraging progress as it starts to combine the strength of Deutsche Investment and pbb. Together, we aim to get significantly closer to our target of 10% commission income by the end of 2027, as Deutsche Investment already represents around EUR 3 billion of the EUR 4 billion-EUR 6 billion in assets under management we are aiming for. Deutsche Investment provides us with a fully fledged addition to the value chain of real estate and ongoing commission income. pbb offers the strength and expertise of a specialist real estate bank with access to financing and investors. It is a perfect fit. pbb's own efforts to launch an in-house debt fund are continuing unabated. We are currently in concrete talks with a group of interested institutional investors. In the originating cooperate division, we have established a sustainable partner network. The product range is in place, and the team is m ostly complete.
All the operational requirements are therefore in place. I would now like to hand over to Marcus, who will guide you through our key financial figures.
Thank you very much, Kay, and good morning also from my side. As usual, let me start with the operating and financial highlights. Kay has already discussed in detail the new business development. On slide 10, you see how the ongoing transition to a more profitable, better quality portfolio currently still affects the rep portfolio volume, which has come down by EUR 1.4 billion year to date, standing at EUR 27.6 billion per quarter end. As mentioned, we expect that to stabilize here as new business improves. At the same time, it is intended the non-core portfolio has come down further to EUR 8.9 billion. This brings me already to the P&L overview on slide 11.
First, perhaps a quick reminder, which is also of methodological nature. As you know, with first half-year results, we booked EUR -314 million one-off risk charges for the U.S. exit, affecting the fair value result within operating income by EUR -31 million and risk provisioning by EUR -283 million. This Q2 one-off effect is, of course, also impacting nine-month results. To analyze the underlying operating and development, we again also show you adjusted figures, always shown in gray, excluding these Q2 one-off U.S. risk charges. With that in mind, adjusted operating income is down EUR 78 million year over year, from EUR 425 million -EUR 347 million, mainly reflecting two developments. One, NII and NCI is down EUR 48 million year over year as a reflection of a clearly reduced portfolio in consequence of our deliberate de-risking and our focus on profitability.
Also, on the liability side, we still digest cyclically higher funding cost vintages of recent years, where the Tier 2 exchange from July results in ongoing our debt capital expenses. Second, adjusted realization and other income is down EUR 30 million, as 2024 had significantly benefited from extraordinary realization income from non-core asset sales and liability buybacks. That said, operating costs remain strictly managed. As expected, general and administrative expenses are down from EUR 179 million -EUR 173 million year over year. Especially run the bank costs were held in check, while investments into our transformation were maintained. I will come back to that in more detail. Adjusted for the one-off U.S. risk charges in the second quarter, risk provisioning almost halved from EUR -140 million to EUR -73 million year over year. This is a reflection of our active de-risking and gradually stabilizing markets.
For the first nine months, this results in an adjusted pre-tax profit of EUR 79 million, which is up by EUR 14 million from EUR 65 million in H1 this year. This EUR 79 million adjusted pre-tax profit is only slightly down from EUR 87 million in the first nine months of last year. Including the EUR -340 million one-off U.S. risk charges booked in the second quarter, reported pre-tax loss therefore declined from EUR -249 million in H1 to EUR -235 million in the first nine months. That brings us already to the deep dive on operating income. I'm on slide 12. Also, on a quarterly basis, you see the effect of the portfolio and funding transitions. Compared to adjusted operating income of Q2, we still came down by a bit in the third quarter, from around EUR 119 million -EUR 110 million, mainly driven by EUR -7 million lower NII and NCI.
I would like to break that down for you. First, NII is down by EUR - 5 million -EUR 99 million, reflecting the following: higher portfolio margins, not fully compensating for the lower portfolio volume; ongoing transition in our funding, i.e., costly funding vintages only being gradually substituted by currently cheaper funding; temporary funding excess, as we had already more than completed our annual funding agenda by late summer; and also the optimization of our capital structure, i.e., the Tier 2 exchange from July, which created an extra 170 basis points of own funds but comes with higher interest expenses from here on. Second, we had no NCI in the third quarter, which means a reduction by EUR -2 million quarter over quarter. Also, realization income within operating income is slightly down by EUR 2 million quarter over quarter to EUR 4 million and was largely driven by prepayment fees.
Lastly, adjusted other income within operating income remained stable at EUR 7 million, however benefiting from a one-off settlement agreement. To sum it up, while overall adjusted operating income therefore fell by EUR 9 million quarter over quarter, adjusted pre-provision profit again remained rather resilient. The described top-line drag was partially compensated by a EUR 5 million drop in total costs, so that adjusted pre-provision profit was only slightly down from EUR 51 million in Q2 to EUR 47 million in Q3. That leads me over to a deep dive in operating expenses on the next slide. Operating expenses, including depreciation, remain well managed, being down -3% for the first nine months and -9% for the third quarter year over year, despite ongoing investments into our strategic transformation. Quarter over quarter, we saw a small net increase of operating expenses of EUR 1 million.
Non-personal costs were up EUR 1 million quarter over quarter, mainly by increased investments into the U.S. exit and the organizational alignment to strategy 2027. Also, personal costs are up by just EUR 1 million, as the second quarter had benefited from the release of provisions. All in all, personal costs stay on a regular level. For the fourth quarter, we expect a moderate uplift in expenses, again mainly from costs related to the U.S. exit and ongoing investments into our strategic transformation. On the lower half of this slide, you see a deep dive on how we increase the operating efficiency of the bank and maintain cost discipline for the running bank operations. Year over year, we reduced these running bank costs by -3% for the nine-month period and -10% for the quarter.
As you can see, this cost discipline and efficiency in the running bank operations enables us to invest on an ongoing stable basis, be it our IT transformation in 2024 or our ongoing investments into our strategy 2027 transformation. Although the cost base has been well managed, the cost-income ratio remains elevated at around 60%. This is a result of the operating income transition described above. With that, we move over to a deep dive on risk provisioning. I'm on slide 14. Risk provisioning of EUR -33 million in the third quarter is mainly driven by stage three additions for two German legacy development NPLs, for which we booked additional EUR -26 million in stage three loan loss provisions. This was necessary to support the respective exit strategies. In addition, one new European office NPL resulted in further stage three loan loss provisions of EUR -6 million.
Furthermore, one U.S. loan shifted into NPL, but risk provisioning needs are covered by existing U.S. risk charges and, among others, by a transfer of related existing stage three provisions to stage three. No new LLPs for the U.S. For performing loans, model-driven stage one and two loans and provisions of marginal minus three and positive modifications effects of the same amount effectively netted out. Including one-off U.S. risk provisions in Q2, loan loss provisions for the first nine months therefore sum up to EUR -356 million. However, adjusted for one-off U.S. risk charges in the second quarter, risk provisioning almost halved, as mentioned, from EUR -140 million - EUR -73 million for the first nine months year over year. This reflects active de-risking of our portfolio that has already taken place, as well as stabilizing markets.
That said, further de-risking of idiosyncratic risks, especially from our legacy German NPLs, may require further support for the execution of exit strategies. As the development of the stock of loan loss allowances is more or less just a reflection of risk provisioning income that I just explained, I will skip slide 15. Just to reiterate, with increased loan loss allowances, the NPL coverage ratio remains stable quarter over quarter at 30%, despite the addition of two NPL in Q3. This brings me to the portfolio section, starting with the performing portfolio on slide 17. All in all, the risk parameters show a further stabilization of the underlying portfolio quality, both in the European portfolio as well as in the total portfolio, a reflection of continued bottoming out of commercial real estate markets and our portfolio transition.
Average LTVs have stabilized at a level of 55%-56% since the beginning of the year. Twelve-month rolling valuation adjustments have further improved in the third quarter. When looking at layered LTVs, the exposure at risk continues to decline compared to peak levels at the beginning of the year, actually by -16% in the total rep portfolio and -12% in the European rep portfolio. On the following pages, I will now discuss, as usual, the areas of focus. Further supporting material that you know can be found in the appendix. Total NPLs are up by EUR 158 million in the third quarter to EUR 2.1 billion, mainly driven by the two aforementioned new additions: EUR 168 million U.S. office loan covered by existing U.S. risk charges and EUR 167 million European office loan with only moderate stage three risk provisioning need of EUR 6 million.
The remaining addition mostly results from EaD effects on legacy development NPL, only partially compensated by FX effects. In Q3, there was no NPL restructured or repaid. All in all, NPLs and stage one, two, three loan loss provisions continue to be dominated by the U.S. and German development loans, both having our ongoing high attention. As already mentioned, the NPL coverage ratio remains quite stable quarter over quarter at 30% due to increased stage three loan loss provisions. This brings me to slide 19, the development portfolio itself. All in all, the development portfolio has been managed down to EUR 1.8 billion, down EUR 600 million or 25% year over year and 18% year to date. In the first nine months, 14 loans with a volume of EUR 710 million have been repaid or transferred to investment loans. As always said in the past, selective developments remain part of our business.
We therefore contracted five new loans with a total volume of EUR 237 million in the first nine months. They are EUR 182 million in the third quarter. On this basis, the development portfolio slightly increased in the third quarter, as you can see. As mentioned with regards to development NPLs, the market remains challenging and idiosyncratic risks remain. We continue to focus on the completion of properties in construction and finishing phase, which requires ongoing support to mitigate downside risks and to ensure the exit of these properties. It is important to say that we had no new development NPL in 2025. Similar to last time, briefly on the European office portfolio, as we now focus our business purely in Europe, and office currently still makes up for a large part of our portfolio. I'm on slide 20.
In line with our diversification strategy, also, the European office portfolio declined EUR 600 million year to date and EUR 300 million in the third quarter. All in all, the performing office portfolio remains of solid quality, with stable average LTV of 59%, improved 12-month rolling valuations adjustments of -2%, and further -12% quarter over quarter decline of the exposure at risk. While core locations are stabilizing further, a few selective sub-markets remain more difficult. The NPL volume has thus been up slightly in Q3, comprising one new NPL in a more challenging continental European sub-market. Capitalization remains solid with a CET1 ratio of 15.4% as per end of September, up slightly on Q3 profit retention and slightly reduced RWA.
The own funds ratio increased substantially by 1.7 percentage points to 19.7%, reflecting the Tier 2 exchange in July that resulted in a significant improvement in the efficiency of our capital stack. Our SREP capital ratio requirements have remained unchanged. Our overall ambition level through the cycle of at least 14% CET1 remains unchanged. Finally, on funding and liquidity on slide 23. All in all, we maintain a resilient and balanced funding mix with a focus on efficiency and cost optimization. With EUR 2.1 billion Pfandbriefe issued, a successful EUR 750 million Senior Preferred benchmark, and our successful EUR 300 million Tier 2 issuance, we've more than completed our funding agenda 2025. As a result, our liquidity remains solid with an LCR of 209% as per end of September and a liquidity position in excess of EUR 5 billion. Lastly, on my part, on funding costs on the same page.
Our Pfandbriefe spreads have come down a bit since last year, but covered bond spreads in general remain higher compared to QE times. However, our unsecured funding costs have come down significantly compared to peaks. Our EUR 750 million Green Senior Preferred issuance came at M S +120 basis points, which is by far the lowest spreads since 2022, as you can see. Also, with our opportunistic approach, the spreads of our retail deposits have come down further, with a three-year spread of currently around 25 basis points compared to a historic average of around 45 basis points in the period since 2019. Provided the strength on unsecured funding continues, it should in isolation provide some relief on interest expenses as higher cost vintages run off. On the other hand, as mentioned, the highly beneficial Tier 2 issuance comes with higher costs as we tendered ineffective but also inexpensive legacy notes.
With that, I conclude my remarks and hand over back to Kay. Thank you.
Thank you, Marcus. Ladies and gentlemen, let me conclude by summarizing the most important points once again on page 25. Strategy 2027 is our guiding principles. Execution remains on track, and we are making good progress. The acquisition of Deutsche Investment Group should be closed shortly. This is a milestone in diversifying our income streams. New business is growing well, and it is growing profitably. However, market growth is currently falling short of our expectations. This means that our European focus new business cannot yet fully compensate for the de-risking of our U.S. and development portfolios. We are making progress with our exit from the U.S. and expect to take significant steps in the next months to substantially reduce risk positions and portfolio volume.
The transformation and de-risking of our real estate finance portfolio is impacting the nine-month results of the 2025 financial year and will remain the focus of our activities in the fourth quarter. Our liquidity and capital base remains strong and thus continues to be our stable backbone of the transformation that is ongoing. The market outlook remains cautious. For the full year 2025, we are now expecting new business volumes of EUR 5.5 billion-EUR 6 billion and a real estate finance portfolio of between EUR 27.5 billion and EUR 28 billion. We currently expect a positive contribution to earnings in the last quarter of the year. However, depending on progress in de-risking the bank, we cannot rule out a loss. That is why we are forecasting a wider range as usual for the full year results, including the one-off charges for the U.S. exit.
We expect at best a pre-tax result of EUR -210 million. Even under very severe developments, we would not expect the annual loss to exceed EUR -265 million. Adjusted pre-tax earnings for 2025 would therefore range between EUR 50 million and EUR 105 million. Ladies and gentlemen, thank you very much for your attention, and Marcus and I are now looking forward to your questions. Thank you.
Ladies and gentlemen, if you would like to ask a question, please press nine and the star key on your telephone keypad. In case you wish to cancel your question, press three and the star key. Please press nine and the star key now to state your question, and please hold the line. We will now register your questions. The first question goes to Miriam Killian of Deutsche Bank AG. Please go ahead.
Yes, hi guys.
Thank you for taking my question. I have actually six in total, and I would like to start with three quick ones if I may. First would be if you could please tell us the new business margin in the third quarter and your expectation for the margin going forward. I would like to get some more color on the stated moderate uplift in costs expected for the fourth quarter. What can we expect here? Finally, looking at fee income this quarter, it is at zero, and strategy 2027 aims for 10% contribution from the fee income line. Do you expect all of this coming from the acquisition of DIG ? I would follow up with the next three after those.
Happy to take a thank for your question and thanks for having joined our call today again. I think there were three.
Actually, I start with the last one first with regard to fee income. We aim to achieve 10% as you know, by end of 2027, and that is a mix in particular driven by, of course, the development of our real estate investment solutions business. Therefore, the acquisition of Deutsche Invest the segment of pbb invest is a major milestone and moves us towards this goal. This is not the only one, right? We are currently working to, in the same business segment, build up our own debt fund. Yeah, I mentioned that in my speech, and we are working on it. We are in very advanced conversations, and we are, unfortunately, not able to close it. That is currently our expectation this year. That would be a surprise because the investors that we are talking to, they are focusing on investment allocation for 2026.
We are unabated working on driving that business line forward. The second one is our O&C business. I mentioned that we have ramped up the team. We have set out the products, and we have built up a partner network, and we are working on getting the first transactions done and also earning a fee income out of that. The answer would be, no, it is not only the Deutsche Investment. It is a combination. Of course, we expect to develop that until the year end 2027 to be around 10% of overall operating income. I would probably hand over, Marcus, to you for the other two.
I think the other two are quick. New business margin in the isolated Q3 was between 210 basis points-215 basis points. For the nine-month period, as you can see, it is 230 basis points.
As you said, we had a marginal cost increase in Q2 quarter on quarter, and we expect that trend to continue. Number one, there are seasonal effects that we always have for year-end. Number two, as I said, we are, of course, investing into the exit for the U.S. with transactional costs that occur. Number one. Number two, and we invest into the transformation with strategy 2027 with the also organizational setup. In total, I would expect no more than 10% from where we are at Q3 at this stage.
All right. Thank you. Maybe the next three would be regarding the new guidance that you put out for full year 2025, particularly on PBT. If I look at consensus, we are at around EUR -180 million for the full year 2025.
Just wondering what we can expect here for the fourth quarter, looking at the guided number. Then a quick one on the originate and cooperate business. I just wanted to know how this is progressing and what we can expect for next year. Finally, the strategy 2027 targets that remain unchanged. New business RoTE is at 9%, but if I look at overall RoTE, there is still quite a distance to bridge to reach those 8%. Just wondering if you could share any specifics here. Much appreciated.
Yeah. More than happy to do that, and thanks for those questions. Maybe quickly on the O&C business, as I just said, we have built up the partner network. The team nearly completed. They have put additional people on the platform to build out that business, and we have also defined the product range. We have a pipeline of transactions.
It's fair to say that we expected some revenues to come out of that business line already in 2025. However, when you look at the markets, and I think fairly saying also the priorities that we have set for 2025 for ourselves, the focus on O&C will definitely be more on 2026. We expect then a transaction volume to be handled through that and getting first fee income. Therefore, it's good to have that business set up, and it will contribute then in 2026 and growing into 2027. With regard to the overall guidance for the Q4 results, as we said, we do expect for the full year, and now I take the one-off into consideration, at best EUR 210 million. We are currently at EUR 235 million, so that gives the range for the fourth quarter.
Then we said even under very severe conditions, and I come to that and explain that a bit, we would not expect the full year profit to be below EUR -265 million. That is the range that we have outlined. Why is that such a wide range? I think the answer is twofold. One is we would have expected a better market condition compared to where we are as of today. I said that in my remarks that transactions volume remains pretty muted. We do pretty good business when you think of 60% of new business growth. We are doing pretty well, but we would have expected more coming out of the new business. Given those subdued markets, that has an impact, and you can see that in the third quarter.
I said that for every asset that is not in the best location, does not have the best amenities, or the projects which might currently have bigger problems already, for those, it gets a bit more difficult compared to what we expected. The second answer is that we are focusing, in particular in 2025, on transforming our portfolio. We are focusing on de-risking, and there are two components to that. One is the U.S., and we covered that. The other component that we highlighted is the development portfolio. Therefore, when you look into the development portfolio already, we are not satisfied with the developments in the third quarter, as most of the CLP in the third quarter was coming out of the developments.
When you look for the nine months of the overall provisioning levels that we had, when you take out the U.S. provisioning, you had the remaining piece of EUR 79 million of CLP for the nine months. EUR 40 million of that sits in developments. The current market development and the experience that we have seen in the third quarter is giving us a more cautious outlook with regard to the development book. Honestly, we also aim to de-risk that and will pay attention in the fourth quarter to further de-risking. That is the reason why the range is also, for our standards, rather wide. Those are the drivers that sit behind it. Of course, we are looking into scenarios. As said, on the EUR -265 million, that is really considering a very severe development for the fourth quarter in itself.
As we speak here, as of today, we do expect a positive result. There was a third question, which I have to admit. Could you 2027 targets? The 2027 targets, yeah. Looking to that. I said the strategy 2027 remains our guiding principle. In particular, increasing profitability. You said that our new business is on the real estate finance side at 9% RoTE for the nine months. Everything that we put on new is really improving the profitability of the portfolio. The challenge here, when you look at the overall profitability of that book, currently is not the new transaction that we bring in. We want to keep that level of profitability. It is the pure development of the book overall, which is a residual of our aim, in particular in 2025, to de-risk the book.
That is, we cannot compensate for that at the moment. We have, with investments like opening a branch in Amsterdam, our key focus really is to strengthen our sales force because we need and have to put more efforts in getting more new business through. As said, with more than 60% growth year over year, we have demonstrated that we can grow in a very challenging market environment with low transaction volume and also quite some demand for good assets. We have to step up our effort to get our portfolio to the target of EUR 29 billion. We will take that as a guidance for 2027. However, the market environment, as I have outlined at the moment, is below our own expectation. For the rest, as said, we spoke about the commission income that remains at the 10%.
Of course, we would aim to achieve that. We have done a good step forward, so we are good on track for those. Yeah, with regard to costs, also touching on that, you have seen we continue to keep, even in those difficult market environments on the one hand, and our internal reorganization on the other hand, we pay a lot of attention on cost development, also allowing for keeping our investments into the transformation of the bank. Therefore, with regard to cost development, we will strive to continue the direction that we have shown you in 2025 already.
Thank you.
The next question goes to Jochen Schmitt of Metzler. Please go ahead.
Thank you. Good morning. I have two questions, please, both on European office NPLs. Firstly, could you provide some details on the property underlying the new NPL?
Secondly, on slide 20, NPLs in the European office portfolio have increased in recent quarters. How should we expect this to develop in the coming quarters? These are my questions. Thank you.
Thank you, Schmitt, for your question. Let me highlight and put a little bit into perspective. First of all, we are reporting on a very granular basis. You might understand that we would not comment in more detail on a very single transaction. That is the second point I would like to highlight. It is just one transaction. The office book that we have is more than EUR 10 billion. From that side, I would call that a normal development in a very substantial book.
What we see, and you are referring to the development of CLPs in the office book, yes, given the market developments that we have seen, we have seen slight increases in the book. I think that is not surprising given the challenge that overall sits in the office portfolio. When we compare that with very isolated cases that we see, and Marcus has mentioned, in certain areas, in certain cities, in certain markets, there is pressure on the office portfolio. We have managed the office portfolio very stable so far, with just in this quarter, literally one transaction that went into default.
Thank you.
Maybe I covered that. Yeah. Thanks, Mr. Schmitt.
The next question goes to Borja Ra mirez. Please go ahead.
Hello. Good morning. Can you hear me?
Yes, Borja. Good morning.
Y eah. Perfect. Thank you very much for your time.
I have two questions, please. Firstly would be if you could provide your views on the gross margin going forward, if maybe it is 200 bp s, maybe does it make sense as a target? I would like to ask on the funding, so you have pre-funded some assurances. Maybe there is some benefit to come in 2026? Just thinking about the moving parts in the NII, maybe there is some tailwind from maybe better funding costs next year. Lastly, on the U.S. de-risking, sorry, I know it has been asked, but maybe if you could provide some details on how you would think about the deleveraging in the coming quarters, what could be the proportion?
Thanks very much, Borja. Good to have you around again here. Look, the first question was on what would be our view in terms of how gross margins are developing.
I think, Marcus, you mentioned the gross margin that we had in the third quarter. On nine months, we are at 230 basis points as we reported. Honestly speaking, where the markets are currently are, it is probably fair to expect those margins to remain stable for the time being. We are at least looking for that. There is competition on certain asset classes, and therefore, next to margin in itself, for us the return on tangible equity is even more important. You could have certain transactions that are on the level of capital that you deploy more profitable with a lower margin compared to another one. Therefore, gross interest margin is a guiding principle, but for us, the key one is on a transactional level, cost fully loaded, the RoTE base.
I think the guidance from where we are at the moment, rolling that forward is a good way to look at current markets. With regard to the de-risking of the U.S., before I hand over, Marcus, for you to the funding question, Borja, that you had. Look, I can tell you, Borja, we are working on all cylinders to make progress on the de-risking. The faster we can be, the better. We are currently looking on the performing loan side, as we have stated, on a transaction shielding the risk in the U.S. book of up to EUR 2 billion. We are working full steam on that, and we hope to close that as soon as possible. I would not get, Borja, into more details on the timeline.
We try to show what the performing book of what the rundown profile would look like if we would not do anything. You see there is a loan in the fourth quarter. When you do the math, another EUR 200 million that is going to come down to EUR 2.4 billion. You have us, as I said, working on a transaction of up to EUR 2 billion gives you a flavor in terms of timeline, focus, priority on that. On the non-performing side, it is fair to say, I said that there was no repayment in the third quarter, and we are not satisfied with that, as we are working very hard on individual transactions. What we can see is that in the fourth quarter, we are going to make first progress on transactions.
However, it's also fair to say in terms of guidance, executing in the current market environment and in certain markets that remain not easy, also in the U.S., it's full steam on our side to get it done and to get all parties agreeing and to get all signatures done. We are working very hard, but expect also the non-performing book starting in the fourth quarter to see first reductions, and that will then gradually also move into the first and the second quarter. Really take the next three to nine months as a guiding, Borja, for us reducing stroke shielding the risk in the U.S. book to really make substantial progress in the exit.
Also to your question on, so to say, the other side of the equation on NII, I agree with you.
Perhaps looking again at the shares of the onion at the end of the day, you are right. We had more covered bonds issued at EUR 2.1 million than we planned for. We had issued with the really good demand we had in August for the Senior Preferred that we planned for with the EUR 750 million benchmark, which is larger than normal for our standards. We have exactly issued what we wanted in tier two, but got slightly less back than we expected. Net, that is also positive funding, if you wish, right? On the one hand, the business came in slower than planned. You are right. We have pre-funding, which will now be running down as the year evolves. Therefore, new business will consume the funding that we have. Therefore, that should be all things equal a supporting factor.
As you know, there is not only the amount, but also the prices for the different quantities. As I try to briefly illustrate, I think on the unsecured side, you have clearly a helpful trend because you saw that on page 23. We really have been getting our spreads down ever since the pandemic. We were at peak levels. We were 250 basis points for Senior Preferred and now issued at 120 basis points, which is less than half from peak. Also, duration of our senior is typically low. Therefore, basically, the old expensive vintages now start to work themselves out and provide relief. On retail, the same applies because remember, in peak times, we ramped up the business to more than EUR 8 billion, therefore paying up.
As I said, the margin also on the deposits has come down from the 45 basis points, say, average over the last six or seven years to now 25%, say, for example, for the three-year vintage. Also, that helps. There are other elements, and that is namely Pfandbrief. At the end of the day, also on Pfandbrief, you saw that we came down in our costs compared to last year and increasingly so as the year progressed. We are, of course, still with the 62 basis points on average for the first nine months, well above, for example, the 2023 vintage that you see at 40 basis points. That is, of course, a reflection also of the overall market because at the end of the day, we are not at the moment coming back to pre-pandemic QE-type Pfandbrief spreads anytime soon.
Plus, duration of Pfandbrief is longer, so it takes longer time to wash these more expensive vintages out. For the moment, that could be a drag as we move along. Obviously, the capital replacement, as important as it was and as effective as it was, it is, of course, as I mentioned, a drag on the liability side because the existing ones that were completely ineffective were roughly 200 basis points cheaper than the new ones we issued. There are various effects, some help and some drag.
Thank you. I would like to ask a follow-up question, if possible.
Sure.
Thank you. I would like to ask if you could provide some details on the ROE for 2026, maybe some thoughts about the moving parts in the P&L, please.
Yeah.
Borja, at this stage, honestly, we would not be in a position to give a guidance on that. Therefore, please understand that we are not giving any guidance on that level at the moment.
That is not it. Thank you very much.
The next question goes to Tobias Lukesch of Kepler Cheuvreux. Please go ahead.
Yes. Good morning. Also, three questions from my side, please. Touching on NAI, risk costs, and then capital and capital distribution. On the NAI, you just elaborated on the funding spreads and the development. I was just wondering also in terms of the general asset reduction or portfolio reduction that you still see coming. Let us see if new business can make up for that in the coming quarters. I was wondering how 2026 will look like from a kind of NAI trajectory. Is that more on a flattish versus 2025?
Are we down to then benefit from the lower spreads into 2027 where we do see NAI up? Is that a scenario which is reasonable? Secondly, on the risk costs, I mean, obviously, 2025 is the year of a cleanup. If you look into a normalized quarter, what kind of level would you expect for the risk costs at group level? Thirdly, on the capital, you are guiding for a net loss of up to or pre-tax profit loss of up to EUR 265 million. I was wondering what the RWA reduction is in such a scenario. Obviously, this would potentially go in line with some exit on de-risking. What is the capital impact that you see on the quarter to one ratio from this? Lastly, yes, there is currently no capital distribution guidance out.
Is there any update you can give us on dividends on the earlier talked about share buyback earlier this year? Thank you.
Yeah. Mr. Lukesch, thank you very much for your question. Maybe I start with the one that you asked last around capital distribution to say that we continue to stick to what we said strategically, right? We want to be an attractive share. We know that we are currently in transformation, but we remain committed to our capital distribution strategy. Looking into 2025, it is way too early to call anything around dividend, but it is pretty obvious when one is looking into the results development. And the other component you asked around share buyback, to clearly say, I think we have to do our homework first.
We have to make progress on the de-risking of the firm that will free up capital, and once that's done, we can look into capital distribution overall. That's maybe around the capital side of things. Of course, at de-risking, you ask around quota. Of course, the de-risking of the book, in particular on the U.S. side, is aiming to free up capital. On our side, we would prefer to talk about that once the measures are really done. As you have heard, we are working full steam on getting that done. The direction of Trevor clearly is whatever we do in the U.S. the de-risking side, that should free up capital and should support the CET1 ratio. The RWA density of the book, we are disclosing that. It's the highest in our portfolio. The effects are really aiming coming out of that book to support the CET1 trajectory.
You ask, I think, on risk costs at group level, just looking, Marcus. Oh, sorry. To answer on that, you asked for if I got the question right on a look-through, right? If we take the de-risking initiatives out and get back to more normalized market developments, the risk cost guidance that we have given as part of our strategy 2027 was between 15 and 25 basis points. If you take out the development side of things, and I said nine months was EUR 40 million. If you take out the one-off risk costs for the U.S., you would be at a nine-month around EUR 39 million of CLP out of the remaining book. When you take that into consideration, we are in this range.
In terms of the guidance for a normalized market environment, taking the de-risking efforts separate, the range that we have been given with 15 basis points-25 basis points is a range that we would still see on a normalized basis. There was the question around.
Yeah. I know this. Look, I mean, at the end, Lukesch, you understand, of course, that we will give the update on 2026, as Kay said, with full year results. However, extending from the comments and the discussions we have had so far on the call, I think it is fair to say that we described, I think, quite in some detail the portfolio transition we are making on the asset side and on the liability side. I would expect that this trend and these trends will continue.
At the end of the day, we are intending to act profitable business in the sense of meeting our RoTE hurdles. We do not expect, of course, the markets to pick up massively anytime soon, meaning that the churning of the backbook into the more profitable frontbook will take its time. I think it will take time before we move the portfolio up to the target level, as Kay has described, in the medium term. That said, with every new business that we do, we get more profitability in it. That is something which is, of course, not only reflected in the top line, but I think one has to also consider the bottom line adjusted for risk costs and capital costs. The same applies, as I said, on the funding side.
I think with the effects that are mentioned, we will need less funding on that book. Vintages that were costly will wash out. That will support. In general, I would expect the transition to continue and therefore the NII line to be around that level. In the forecast that Kay has been explaining, there is also some downside baked in. I think it goes also a little bit with the upside and downside swing from the EUR -235 million that we have, with the upside being profitable and on the other side. Around those levels, I would not expect an immediate uptick given the much more sluggish markets than we had originally hoped for. Last addition to the capital point, if I may.
I mean, just stating the obvious that, of course, most of the loss that has been summed up so far is, of course, already reflected in the capital figure of 15.4%, whereas, of course, any relief from sales or risk shieldings are, of course, not considered. Therefore, it's only the incremental potential loss at the tail scenario that Kay described that would weigh against the RWA relief, just stating the obvious.
Thank you.
We have a follow-up question. It goes to Mr. Ramirez. Please go ahead.
Yes. Hello. Thank you very much for taking my follow-up question. Sorry. My line was a bit patchy before. When you answered my question on margins that they would be stable, sorry, it wasn't clear if it was meant that they would be stable on 230 basis points or 215 basis points. Sorry.
I think the margin that we are currently seeing in the third quarter was around 210 basis points, 215 basis points. When you add up for the full nine months, it was 230 basis points. The way I answered this is that you can expect that reasonable to drag forward. It is in this range as we have seen it for 2025.
Perfect. Very clear. Thank you very much.
Ladies and gentlemen, thank you for your questions. Since we did not receive any further questions, let me hand back over to your host for some closing remarks.
Yeah. Obviously, there are no additional questions. Sorry. Sometimes it is good to give it another second of thought. First of all, thanks very much for dialing in and thanks for the question.
I think with regard to closing remarks, what we can say is I think we stressed that we are working on strategy 2027, and that is a transformation for the firm. When we look out to the markets there, the market is where the market is. We would have expected it better, but it is not. We are dealing with that. The focus remains on our side of getting our profitability in the core business up. We are making steps there. Also, diversifying our income streams. With the acquisition of Deutsche Investment, we are making a substantial step there. We are and we have demonstrated that over the quarters, we remain focused on cost, and we will continue to do so. Those are the levels that we are working on. Thanks very much for dialing in.
If there are additional questions or anything, you know how to reach Axel and Michael. The contacts are there. Please do not hesitate to reach out. From my side, as well as in the name of Marcus and our entire team, thanks very much for dialing in and w ish you a good day.
Thank you very much.