Hello, ladies and gentlemen, and welcome to the Deutsche Pfandbriefbank analyst call regarding the publication of the preliminary annual results for 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, CEO of Deutsche Pfandbriefbank.
Thank you very much. Ladies and gentlemen, warm welcome from my side, from our side. Marcus, our CFO here as well. Thanks very much for taking the time joining our first analyst call in 2026. Before Marcus and I will take you through the preliminary facts and figures for 2025 and also a prolonged view on the outlook for 2026-2028. As usual, we are doing that based on IFRS figures for the group. I would like to take the opportunity to inform you that we are going to slightly amend this call going forward. Yeah. Have decided, yeah, with starting into a new year, yeah, to develop a bit further in the setting here.
Going forward, not only our equity analysts, but also you know, sell-side credit analysts who are covering PBB on a regular basis are invited to ask questions. This is clearly aiming for, you know, even further broadening the communication and the dialogue with the community that is covering us in great detail. I'm really looking forward together with Marcus to your questions that are coming from both of you, from our equity analysts as well as our debt analysts, both from the sell side. As always, there will be sufficient time left on our side for questions and answers at the end of the session. Ladies and gentlemen, 2025 was a landmark year for PBB.
We made far-reaching decisions that go well beyond what we presented to you on our Capital Markets Day back in 2024. The transformation of PBB is more intense and therefore more time-consuming than originally anticipated. In addition, the market recovery remains sluggish, providing us with less momentum in the new business than expected and in some countries with additional regulatory headwinds. This makes it more difficult to achieve our strategic goals and limits our flexibility and also latitude for action. However, we remain fully convinced that we are on the right track. We are working hard to make the bank more resilient, profitable and diversified. We are not losing sight of our strategic goals. Despite difficult conditions, we have already made good progress. As a result, we succeeded in significantly reducing the bank's risk profile in 2025.
Repayments totaling EUR 1.4 billion and the EUR 1.7 billion significant risk transfer transactions at the end of last year enabled us to substantially reduce our risk exposure in the U.S.. This represents a major step forward in our withdrawal from the U.S. market. We were also able to reduce the risks associated with the existing non-performing loans in our development portfolio. With that, we deem the shielding and risk coverage of the U.S. and the development books as in general completed. At the same time, we are encouraged by the significant increase in new business to EUR 6.3 billion, including prolongations larger than 1 year. In a challenging market environment, we were able to increase new business volume by 23% compared to the previous year. In doing so, we are consistently tapping into new asset classes in order to diversify our portfolio.
In 2025 we remained below our original goals of between EUR 6.5 billion-EUR 7.5 billion. Our key indicator of profitability, return on tangible equity, was around 8% for the new business, which is already in line with our strategic ambition level. We have also made progress in diversifying our income streams. The acquisition of Deutsche Investment will broaden our business model. In 2026, Deutsche Investment will make its first notable low capital binding contribution to PBB's overall results with its commission income. Despite our efforts, we have not succeeded yet in placing our first own investment product in what is a difficult real estate investment market. We continue to see the great market potential and remain committed and confident to make progress in the future.
The decisions we made last year to put the bank on a more sustainable foundation for the long term had a significant negative impact on our 2025 annual results. With costs of around EUR 366 million, the decision to exit the U.S. market and the de-risking of the non-performing development loans contributed significantly to the negative pre-tax result of EUR 250 million. Due to this significant negative pre-tax result, the bank will not pay a dividend for the financial year 2025. With regard to AT1, the conditions for servicing the instruments are currently well met. However, as you know, for regulatory reason, we are not allowed to comment at this time on whether we will pay the AT1 coupon in April as we have always done in the past.
With a CET1 ratio of 14.9% at the end of 2025, the bank remains solidly capitalized. The SRT transaction resulted in a significant RWA reduction of EUR 1.1 billion. This was offset by necessary regulatory loss-given default adjustments to capital requirements in our F-IRB regime. These adjustments are linked to country-specific and backward-looking loss developments in the respective commercial real estate markets. They are completely independent of the performance of our portfolio or individual PBB loans. The embedded threshold and trigger mechanism increases the volatility and procyclicality of the F-IRB capital regime for commercial real estate in the current market environment. In Q4 2025, the effects are primarily caused by the loss rate development in the countries of Poland and Finland. We will discuss these effects in more detail later.
For 2026, we expect pre-tax earnings to be in the range of EUR 30 million-EUR 40 million. The U.S. exit in particular will continue to have a significant negative impact with SRT costs of around EUR 44 million. Additionally, sluggish market recovery will not offer significant support. The most important KPI for us remains the improvement of the return on tangible equity to 8%. For the whole bank, we expect to achieve this profitability target in 2028, one year later than originally planned. Ladies and gentlemen, we are not satisfied with our 2025 results or the outlook for 2026. The transformation of PBB is more intense and therefore more time-consuming. Even more in the current market environment, it requires more resources than we had originally anticipated. Still, it remains the right thing to do, and it is necessary on this scale.
Let us now take a brief look at market developments on page 5. We can all observe the high level of volatility at the macroeconomic and in particular the geopolitical level on a daily basis. Just last weekend, a new armed conflict broke out engulfing the entire region, the Middle East. This volatility, as well as the associated uncertainty and unpredictability, are likely to remain with us for the foreseeable future. At the same time, unstable economic outlooks and volatile tariff policies continue. We therefore expect growth in Europe to remain at a low level. Inflation is stable at around 2% within the ECB's target range. Interest rates in the Eurozone are not likely to fall in 2026. In economic and interest rate terms, therefore, low or only minor stimuli are to be expected. The European real estate market remains in a phase of slow growth.
We do expect further continuous improvements, albeit at a rather modest level. In line with the consensus among many market experts and their forecasts, we do not anticipate a breakthrough in 2026. Sentiment remains subdued and investors remain cautious. However, we intend to leverage our good momentum in the new business of the fourth quarter of last year and continue to grow this year as well. However, attractive financing opportunities that meet our risk return profile remain rather underrepresented and are therefore highly competitive. This is clearly evident in the transaction volumes in commercial real estate financing in Europe, as you can see on page 6. In line with the significant rise in interest rates, the volume of transactions slumped by almost half. Since then, the markets have been recovering steadily but hesitantly.
We expect transaction volumes in Europe in 2026 to remain notably below the 2022 level. Although the ECB's key rate has normalized, it remains well above the level seen during the historically low interest rate phase. Everything therefore points to a continued sluggish market recovery in an unstable environment from which PBB can itself not completely decouple. Let me now turn to our business segments, starting with Real Estate Finance Solutions, our core business pillar on page seven. Already mentioned, we significantly increased our new business volume by 23% to EUR 6.3 billion. We had a stronger than expected fourth quarter with a high proportion of genuine new business commitments which grew to 63%. The return on tangible equity in new business remains at around 8%, thus meeting our profitability requirements. We are also making progress in diversifying our books.
Our growth asset classes with hotels, data centers, student and senior housing now account for around 7% of our new business with a stable pipeline of just under 20%. Before I move on to Real Estate Investment Solutions, I would like to give you a deeper insight into the progress of our withdrawal from the U.S. market, all on the next 3 pages. As you can see on page 8, we have made strong progress in reducing the U.S. portfolio in 2025. Within the last 12 months, we were able to reduce our performing books by a third from EUR 3.3 billion to EUR 2.2 billion. Of the remaining EUR 2.2 billion, the SRT covers a portfolio of EUR 1.7 billion. This leaves an economic risk position of only EUR 500 million in our performing portfolio.
You can see the rundown of our book in the top right corner of the slide. We aim to have almost completely wound down the total of our U.S. exposure by the end of 2029. Let me give you on page 9 some more detailed information regarding the SRT transaction in our U.S. business, which is of strategic importance for us. It is certainly a unique transaction for this market, both in terms of our strategic decision to exit the U.S. market and in terms of the transaction parameters. The transaction covers a performing U.S. portfolio with a volume of around EUR 1.7 billion. It comprises only 26 loans and has therefore a significant higher risk concentration compared to other transactions in the market. In addition, 92% of the portfolio is concentrated in office loans.
PBB retains the first loss piece of around EUR 51 million and is fully protected. This is fully protected by existing Stage One and Stage Two risk provisioning. The mezzanine tranche of EUR 247 million was taken over by Oaktree, protecting PBB against future losses to this extent. The SRT portfolio is expected to gradually reduce until 2029, aligned with expected maturities of the loan portfolio, reducing interest income over time. At the same time, the cost for the mezzanine tranche will also decrease. The SRT transaction provided for an RWA relief in the amount of EUR 1.1 billion and a positive CET1 effect of 120 basis points. Finally, on the U.S. book on page 10, some remarks regarding our NPL portfolio. At the end of 2025, our NPL book in the U.S. stands at EUR 900 million.
In the fourth quarter, we were able to reduce NPLs by around EUR 100 million and have built some momentum. Currently, 5 further loans totaling EUR 300 million are already in advanced exit process for the first quarter of 2026. We are able to exit these loans within our existing valuations. No further material risk provisions were required. This makes us confident that we will be able to further reduce the NPL portfolio in 2026. The coverage ratio for the U.S. NPL book has increased significantly from 20% to 36%, a solid protection. Let me now on page 11 give you an update from our Real Estate Investment Solutions division, which will become PBB's second business pillar from 2026 onwards. The integration of Deutsche Investment with assets under management of around EUR 3 billion is well advanced.
Following the first time consolidation, we expect commission income of around EUR 40 million in 2026. Together, we want to continue to grow in the investment management area, both with equity products and with debt capital markets-- debt capital solutions in the form of funds or mandates for institutional investors. In our Originate and Cooperate business, we are currently finalizing our rollout. We have an established partner network. The sales and origination teams at our locations in London, Paris and Munich are in place. The focus in 2025 was on developing the business model. We are now well positioned to tap into this completely new business area for PBB. Ladies and gentlemen, let's go to page 12. The transformation of our business model requires a transformation of the bank organization itself. We are making good progress here, and with that, we continue to reduce our operating cost base.
We have been able to reduce management positions by around 20%, thereby streamlining our organization. The new target operating model lays the foundation for a more efficient and profitable setup of the bank. We are also focusing on new technologies aligning with market and customer requirements. At the same time, the expansion of our new production hub in Madrid is also making good progress. We successfully hired 27 colleagues, and we want to continue to grow these to around 85 by 2028. In everything we do, we will continue to keep a close eye on our costs. By 2028, administrative expenses in our business area, Real Estate Finance Solutions, are expected to fall by a further 7%. At the same time, we are investing in the expansion of our new businesses in Real Estate Investment Solutions.
At this point, I would like to hand over to my colleague and our CFO, Marcus, who will now guide you through the most important developments and key figures for the group.
Thanks, Kay, good morning and welcome also from my side. As usual, I will now guide you through more detail on 2025 results, portfolio developments, capital, and funding. Let me start with the operating and financial highlights. The operating overview on slide 14 illustrates the ongoing portfolio transition quite well. Kay has already discussed the pleasing profitability contribution from the REF's new business. The key good news is that the overall strategic approach works as designed. Maturing business in the back book is continuously replaced by more profitable, RoTE accretive new business in the front book. Thus, step by step, increasing profitability towards the target of 8% for the portfolio as a whole. However, even though new business volume has been up by 23% in 2025 year-over-year, the slower than expected market recovery still weighs on volume.
New business is not yet enough to compensate for pre and repayments and the significant de-risking of the U.S. and development exposures. Hence, the REF portfolio declined by EUR 1.7 billion in 2025 to now EUR 27.3 billion. We expect this to stabilize from here as new business is expected to further improve gradually over time from here. At the same time, and as intended, the non-core portfolio has come down by EUR 1.2 billion to EUR 8.5 billion year-over-year, including, again, some opportunistic asset sales and liability buybacks also in Q4. This brings me to the financials overview on slide 15. The key P&L figures reflect both the financial impact of our strategic transition and the significant de-risking of the U.S. and development book. With this said, operating income is down by EUR 122 million year-over-year.
EUR 57 million lower NII and NCI and EUR 65 million lower realization in other income. NII is down due to the reduced portfolio volume as well as our funding cost transition and capital optimization. As you remember, among others, we optimized our capital structure with a successful EUR 300 million Tier 2 issuance in June last year, which of course came at a cost. Also, realization in other income was significantly down due to meaningful one-off effects. First, operating income 2025 was negatively impacted by -$32 million U.S. one-off fair value risk charges due to our strategic U.S. exit decision. Second, realization income was down EUR 57 million year-over-year as 2024 had benefited particularly strongly from significant non-core asset sales and liability buybacks. As already mentioned before, we expect realization income to remain at such lower levels now supported mostly by ordinary REF's prepayment income.
As expected, general administrative expenses are down year-over-year by EUR 9 million, while investments into our strategic transformation are ongoing. This demonstrates our ongoing strict cost discipline. Above everything else, 2025 was burdened by the sharp increase of loan loss provisions to minus EUR 410 million. This unusually high LLP were dominated by a series minus EUR 334 million that were set aside for the de-risking of the legacy U.S. and development exposures. To be precise, minus EUR 235 million for the U.S. exit since the second quarter and minus EUR 99 million for German legacy development NPL, which were meaningfully de-risked further in the fourth quarter. Rather moderate loan loss provisions of EUR 68 million or 30 basis points were put aside for the European investment loan portfolio, reflective of a solid asset quality in our strategic core portfolio.
All in all, this resulted in a highly unsatisfactory pre-tax loss of -EUR 250 million, which is, however, within our latest adjusted guidance of -EUR 210 million to -EUR 265 million, and which has to be seen in the context of our substantial de-risking. After total risk costs for the U.S. and de-risking of the legacy portfolio, these were at -EUR 366 million across all income lines. This would then bring me to the quarterly deep dive, and first I'm now on operating income on slide 16. If looking at the quarterly development of operating income also here, the impact of the portfolio and funding transition become clear. However, in the fourth quarter, NII and NCI stabilized at EUR 99 million as further inquiries portfolio profitability almost compensated for the slightly lower portfolio volume.
Funding, in turn, now provided for a moderate tailwind as previous funding excess normalized in Q4 and costly funding which vintages get substituted by gradually cheaper funding. Realization and other income is in sum slightly down by EUR 4 million quarter-over-quarter, as other income in the previous quarter had benefited from a significant positive one-off. All in all, operating income thus has come down moderately by EUR 4 million quarter-over-quarter to EUR 106 million. On the back of EUR 4 million higher total expenses, pre-provision profit therefore declined by a total of EUR 8 million quarter-over-quarter to EUR 39 million. That brings me to the next deep dive on operating expenses, and I'm here on slide 17.
Operating expenses, including depreciation, remain well managed, being down year-over-year by EUR 9 million or 3% in 2025 from EUR 266 million to EUR 257 million, while investments into our strategic transformation are ongoing. Expenses for the running bank operations in 2025 have been reduced by EUR 17 million or 7%. That said, operating expenses in the fourth quarter increased very moderately as envisaged. Due to EUR 5 million higher one-off costs, especially in connection with the implementation of the target operating model, while again, expenses for the running bank operations were down by EUR 1 million. Although the cost base has been well managed, the cost income ratio for 2025 appears somewhat elevated at 61%.
This is however more a reflection of the operating income transition, including the - EUR 32 million, one of the value discharges for the U.S. exit, which has, as you know, to be shown in operating income. Now to our deep dive on the risk provisioning. I'm on slide 18 here. Risk provisioning of - EUR 54 million in the fourth quarter is especially driven by a further de-risking of our German legacy development NPL. With that said, net additions of - EUR 86 million in Stage 3 result from - EUR 55 million for de-risking measures for idiosyncratic legacy development NPL and - EUR 29 million for European Investment NPL. Only marginal - EUR 2 million had to be booked for U.S. Stage 3 in Q4 as the substantial one of U.S.D risking measures in Q2 again proved to remain adequate.
This was partly offset by EUR 31 million net releases in Stage 1 and 2. EUR 50 million release of U.S. management overlay due to the SRT and ordinary repayment, as Kay explained that, was partly counteracted by EUR 19 million additions, mainly from market-wide macroeconomic scenario and parameter updates. I will mostly skip slide 19 as the development of the stock of loan loss allowance is more or less just a reflection of the risk provisioning I just explained and usage of costs from existing stock. Just one brief comment. The REF NPL coverage ratio overall remains stable quarter-over-quarter at around 30%, up from around 22% as per year-end 2024. This brings me to the portfolio. As the U.S. portfolio is on exit and was already covered extensively by Kay at the beginning, I will focus on our strategic core portfolio, the European portfolio.
I am starting with the European performing portfolio on slide 21. With the significant de-risking and key markets gradually but slowly recovering, the quality of the performing European portfolio further stabilized with an ongoing improvement of risk KPIs for the performing investment loans since end of 2024. The average LTVs have stabilized at 55%, a solid level in view of the property price correction seen in the last two years. The 12-month rolling valuation adjustments have gradually improved and continued to do so in Q4. Also when looking at the exposure at risk or layered LTVs, we see a decline by 16% in 2025 and 4% alone in the fourth quarter. With that said, I will leave the further details on the performing European REF portfolio, which you can find on slide 22 for your own reading.
I will therefore continue with slide 23, where we discuss the European NPL portfolio. The European NPL portfolio predominantly consists of German development loans, which account for almost half of the NPL. The remaining 20% in Germany and 11% in France are mainly driven by some selective office properties of two new office loans with a total volume of EUR 239 million in the fourth quarter. 15% come from the U.K. and consist of legacy shopping centers known. The European NPL portfolio is solidly covered by 31%, up from 29% as of third quarter end and 27% as of year-end 2024. This brings me to our deep dive on the development portfolio on slide 24. The development portfolio has been significantly de-risked in 2025, and in particular also in Q4.
The total portfolio has been reduced by EUR 400 million or 16% to EUR 1.8 billion, while NPL have been kept largely flat, with no new NPL rising in 2025. However, legacy NPL have required focused attention with dedicated de-risking and support measures of the exit strategies through the entire year. In Q4, we decided to resheet particularly demanding legacy developments in the final finishing phase and put aside EUR 55 million Stage Three loan loss provisions for those. This brings the coverage ratio for development NP-NPLs further up to solid 29%. All in all, the portfolio is now substantially de-risked and we feel comfortable with the existing coverage. With that, I move to capital on slide 26. With a CET1 ratio of 14.9% as per year-end, our capitalization remains solid.
This is slightly down from 15.4% as of fourth quarter end. Let me explain the various effects in regulatory capital and in particular RWA. RWA stayed flat at EUR 17.5 billion, sorry, reflecting two opposing effects. While the SRT transaction provided for a leave of EUR 1.1 billion RWAs per year-end, a change of applicable regulatory LGD levels in FIRB resulted in an offsetting effect of the same amount. I will come to this on the next slide in quite some detail. At the same time, in the numerator, there was a slight reduction of regulatory capital at circa EUR 100 million in Q4 due to increased potential backstop, such as the expected loss shortfall and the NPL backstop, as well as the fourth quarter loss and the preemptive AT1 coupon reduction from regulatory capital.
All in all, our CET1 ratio of 14.9% stays solid. SREP requirements remain well exceeded with more than 500 basis points buffer over the CET1 ratio requirement and more than 400 basis points over the own funds ratio requirement as per year-end 2025. I would also like to take this opportunity to provide some further context. When looking at capital ratios, it is worthwhile to note that our F-IRB RWA are procyclically elevated so that the F-IRB CET1 ratio of 14.9% at year-end now stands below the pro forma standardised Credit Risk Standardised Approach CET1 ratio of 15.3%, which by many is seen as a regulatory flaw. Also, when looking at our capital on a simplified nominal level, we observe a steady increase of our leverage ratio, now close to a healthy 8%.
This is, of course, down to robust capital and consistent ongoing deleveraging. Taking into account our substantial deleveraging and de-risking and our future focus on core European markets only, we now define our long-term minimum CET1 ratio at 13% through the cycle, still providing ample of buffer to MDA. At this point, let me also reiterate that the conditions for the AT1 coupon payment are clearly met, as Kay said, with a buffer of MDA of more than 500 basis points and available distributable items of around EUR 2 billion. I also want to be very clear here that we continue to see debt capital and its investor base as a key cornerstone of our wholesale-led funding strategy. This brings me to slide 27, where I would like to explain the aforementioned change of applicable LGD levels for commercial real estate for certain countries in FIRB.
In the F-IRB regime, the LGD is dependent on the country's specific eligibility for preferential collateralized treatment. How does this work? The European Banking Supervisory Authorities of each country collect and publish the average trade market loss rate from their national supervised banks on a regular basis. If the commercial real estate market loss rate in a respective country exceeds 0.5%, trade transactions no longer qualify for preferential collateralized LGD levels in the computation of F-IRB RWA. In the fourth quarter, consideration of new loss rates for Poland, Finland, and Austria meant loss of the preferential collateralized LGD treatment in these countries. Even though some of these countries only very marginally exceeded the loss hurdle rate of 0.5%. Given the somewhat meaningful overall PBB footprint in these countries, the underlying RWA increased by EUR 1.1 billion.
In effect, this means that the RWA relief from the SRT has been entirely consumed by the loss of the preferential collateralized LGD treatment for the aforementioned countries. Number one, this development is not about PBB's own economic portfolio quality having deteriorated, but rather down to overall market-induced impacts amplified by the digital nature of the SRB LGD regime that I explained. Given that Poland and Finland have only marginally exceeded the hurdle rate, a digital reversal is possible when the banking authorities in the respective countries publish updated data. With regards to portfolio volume, three-quarters of the countries PBB operates in remain eligible for preferential collateralized LGD treatment, and loss rates remain far below the 0.5 hurdle rate, as you can see in the last column of the table on page 27.
There's been another more recent development. On February 27, 2026, the EBA communicated its position that U.S. loss data published by the U.S. Federal Reserve is not viewed equivalent, even the U.S. themselves are deemed an equivalent regime under the CRR. If applicable, preferential LGD treatment of real estate located in the U.S. would no longer apply in principle when calculating current RWA for these countries going forward. PBB will carefully review this assessment, but if applied, this would result in a pro forma reduction of our CET1 ratio of circa 135 basis points for our entire U.S. portfolio. When also taking the envisaged first time consolidation effect from the acquisition of Deutsche Investment into account, which is -26 basis points and becomes effective in Q1 2026.
The pro forma CET1 ratio as of year end 2025 would be 13.3%. Even at this harsh pro forma level, the buffer to MDA would still be comfortable at around 340 basis points. Finally, a few remarks on the funding and liquidity side. I'm now on slide 28. All in all, we maintain a resilient and balanced funding mix with ongoing focus and, on efficiency and cost optimization. With EUR 2.1 billion Pfandbrief issued, a successful EUR 750 million senior and our successful EUR 300 million Tier 2 issuance, we completed our funding agenda 25 already in summer and provided for comfortable funding access. With LCR 379% and EUR 5 billion liquidity at year-end, we maintain a solid liquidity in line with our reduced balance sheet needs.
Most important, issuance costs have come down on all instruments, slightly on Pfandbrief, more strongly on senior preferred as well as deposits. All in all, we expect this in combination with moderate funding needs to provide some ongoing tailwind on funding costs going forward. This is, of course, looking through current noise as we have no current need to issue anything. In 2026, we plan for a moderate EUR 1.75 billion in Pfandbrief issuance, of which more than 40% have already been done on further reduced costs. In addition, we plan for a maximum one senior preferred issuance of EUR 500 million. The retail deposit volume is planned to stay largely stable at around EUR 7 billion, in line with our reduced balance sheet needs, catering for a 50/50 split in unsecured funding, 50 for each, wholesale and deposit funding.
With that, Kay, I hand over back to you.
Thank you, Marcus. Ladies and gentlemen, let me now on page 30 turn to the future. We have a challenging year, 2026, ahead of us, and the overall situation hasn't gotten any easier with the recent developments since last weekend. Our full focus is on increasing operating income in our two core business areas, Real Estate Finance Solutions and Real Estate Investment Solutions. However, operating income in Real Estate Finance Solutions will be affected by the cost of the SRT. Furthermore, we have to cater for lower positive one-off effects in 2026 compared to last year. We continue to exercise strong cost discipline. We continue to make our core business, Real Estate Finance Solutions, more cost-efficient. The initial consolidation, though, of Deutsche Investment and the further development of our business activities account for higher operating expenses in Real Estate Investment Solutions.
In fact, we are reinvesting cost savings into our new business activities. Nevertheless, the cost income ratio will temporarily increase to between 70% and 75%, mainly due to the development in the operating income. We expect a normalization in risk provisioning. With the U.S. and development books largely shielded last year, we anticipate in 2026 risk costs of 25 to 30 basis points in our core markets in Europe. What does that mean specifically for 2026? Let's go and move to page 31. We want to keep our growth momentum in the new business and achieve a volume of between EUR seven and a half billion and EUR eight and a half billion in real estate financing. We expect a portfolio volume between EUR 27 billion and EUR 28 billion.
In Real Estate Investment Solutions, we expect to grow assets under management to be between EUR 3.3 billion and EUR 3.7 billion. Operating income is targeted to be in the range of EUR 357 million-EUR 425 million. cost income ratio between 70% and 75%. The share of fee income is expected to rise to more than 10% in 2027. As announced, pre-tax profit is expected to be between EUR 30 million-EUR 40 million. Moving to page 32 and looking further ahead, we remain committed to our strategic goals and key performance indicators. return on tangible equity is our main KPI. We are already at around 8% in new business. We want to achieve this for the whole bank by 2028. Operating income shall amount to around EUR 600 million towards 2028.
In Real Estate Finance Solutions, 3 key levers should increase the return on tangible equity. First, SRT costs will decline with the reduction of the U.S. portfolio. Second, more profitable new business will substitute less profitable existing portfolio. Third, a more cost-efficient liability and equity side will improve refinancing costs. In Real Estate Finance Solutions, we target to grow assets under management to EUR 7 billion-8 billion. The share of every operating income is expected to grow well above 10% in 2028. We have already significantly reduced the risk profile of our portfolio. In 2028, risk costs are expected to normalize to around 15 to 25 basis points. We remain focused on an efficient cost base and will continue to execute our cost measures in a disciplined manner.
Cost savings in our Real Estate Finance Solutions business will be reinvested in the development of Real Estate Investment Solutions. Overall, broadly stable operating expenses help to bring the cost income ratio back to target level of 45%-50% by 2028. That brings me to our last page that summarizes our targeted key developments until 2028. Ladies and gentlemen, PBB is in the middle of its transformation to a more resilient, profitable, and diversified European commercial real estate bank. We have to acknowledge that we will not be able to achieve our ambitious goals we set in 2024 within the planned time frames. The market environment, economically and geopolitically, has not developed as we had expected. We are making progress.
In challenging times, we are acting decisively as our exit from the U.S. market underpins, and we sustainably reduce risks in our books. We have the momentum to grow our new business volume, even in a currently sluggish CRE market, and we are doing so profitably. In 2026, we start to see notable first capital accretive contributions from our new businesses. We are on the right track with this fundamental transformation, even if it will take more time. Thank you very much for your attention. Marcus and I are now looking forward to your questions.
Thank you very much. Dear ladies and gentlemen, with that, we are opening the Q&A session. To state a question, please press nine and the star key now. I repeat, the combination is nine star. To cancel your question again, please press three and then the star key. For now, we are looking forward to your questions. Please press nine star. One moment for the first question, please. The first question is from Tobias Lukesch from Kepler Cheuvreux. Please, over to you. One moment, please. Can you hear us, Mr. Lukesch?
Can you hear me?
Yes. Hello.
Yes.
Yeah. It takes 10 seconds until I'm in talk mode. Sorry for that. On the capital, the first question, regarding the EBA communication of the U.S. LGD equivalence, may we see or will we see the 135 basis points negative quarter one ratio impact? If we will see it, what is the timeline for that? Secondly, on dividends, what is the projection for the future? I mean, yes, there were moving parts. Yes, you're cleaning up the business. You say you're on the right track for 2028, but you haven't touched on dividend projections. I was wondering, you know, what this means for capital distribution going forward, especially since you lowered the through the cycle threshold to 13%.
You highlighted, we might get closer to that level if we see the U.S. LGD impact. Then on the U.S. NPL portfolio, this was now reduced to EUR 0.4 billion. What is the projected development here over the next three years? Maybe could you please quantify the impact on risk provisioning guidance you have provided, which will be lower for this year and then further lowered for the years to come. Thank you.
Hello, Mr. Lukesch. Good to hear you. Thanks for your clarifying question on the on the very new statement that came out by the EBA just a few days ago, actually Friday last week. I think, the Q&A are quite clear in that they say that the EBA sees in principle that the computations as done by the Fed don't mean that these computations are eligible for, you know, the European regime. Even though, again, as I said, you know, the U.S. and fundamental and principle are of course an equivalent regime. It's very new, we are carefully assessing this. At this point in time, I would expect clearly that it will happen. I cannot rule out that this will be a Q1 effect already.
Let me again say this would be 120 basis points for the commercial real estate and another 10 roughly for the residential. The stated 130 that you 135 that you see. That is something we expect to happen. We have to carefully assess it and we will update you then on Q1. I would expect it to be reflected in Q1.
Yeah. Mr. Lukesch, I take the other two questions. On dividend, thanks for the clarifying question. We are sticking to our distribution guidelines that we have put out with our strategy on 2024. Yeah. Thanks for raising that question. We want to distribute, yeah, 50% of our profits, and we want to use the tool of dividends on the one hand side, but also share buybacks on the other side. To your last question on the U.S. NPL. Yes, you see, we have quite a good momentum build, yeah. Also based of course, on the provisioning that we did and the shielding to reduce the book. Yeah.
We will more than half reduce it in 2026, and we see over the next 2-3 years, a full exit on that book. However, as we speak, we continuously watch and see whether we can value preserving exit those NPLs earlier. Current projection, with regard to your question, should be then towards 2028 and 2029, in line with the rundown also of the performing book.
Mr. Lukesh, does that answer your question? Do you have a follow-up? We cannot hear you.
Thank you.
Okay. Perfect. Thank you very much. We are moving on to the next question. The next question is from Miriam Killian of Deutsche Bank. Please, over to you.
Yes. Hi. Thank you for taking my question. I hope you can hear me all right.
We can, Miriam. Thanks too.
Perfect. My question would be, surrounding the tax expenses that we saw in the fourth quarter that were quite a bit higher than we anticipated. If you could maybe just provide some color surrounding this, that would be my only question for now.
As you say, for the full year, you know, result pre-tax - EUR 250, post-tax - EUR 284. This is DTA reversals, which you have to mostly see in the context of risk provisioning, but also more importantly in the context of the lowered business projections that we have for future years, which basically mean that we have this impact from DTAs that cater for the EUR 34 million in addition to the EUR 250 million pre-tax loss.
All right. Thank you.
Thank you very much. The next question is from Domenico Maggio from Jefferies. Please, over to you.
Thank you. Hi. Morning. Thank you for letting us also a credit analyst ask question today. I have for on the expected capital erosion from Deutsche Investment acquisition. Is that gonna be 26 basis points or 30 basis points in the next quarter?
Second one would be, what do you mean exactly with a pro forma Credit Risk Standardised Approach? Is this pro forma for some adjustment or is this a normal standardized approach? If the standardized model result in higher capital, then why did you transition in the Foundation model? Third question would be, are you able to switch your capital model again in the future? I assume the ECB would need to approve that. I'm asking this clearly given the unfavorable capital development and your previous transition to different capital models. The last one, what would be the impact to RWA if all countries were to lose their preferential LGD level? Thank you.
Okay.
Okay. Good to hear you, Domenico. To your first question, we've been indicating previously on the signing of the transaction in the summer that the capital effect could be around -30 basis points. That's the number you have in your, in your memory. The precise figure that I gave you is -26 now. It's a clarification of an estimate that you've been hearing with Q2 results. The second point is that you were asking about the nature of the pro forma numbers we were giving. These numbers are basically under the assumption that the bank would apply a credit standardized approach in its entirety instead of the F-IRB model computation with PDs out of a model and LGDs out of a matrix.
It's a substitution of the entire book pro forma into a standardized KSA in German, SC-CRSA in English. It is, of course, a pure exercise to illustrate the very high RWA density that we now have and the capital compression that we face. Obviously a lot of people who are looking at capital ratios see the standardized capital ratios as a flaw to where you could be. The point we are trying to illustrate that at this point, and this is the last answer to your question.
At this point, at the bottom of the cycle, it happens to be that with what is happening in these digital LGD hurdle rates that I mentioned for these countries, that even the standardized approach is better than the F-IRB in this part of the cycle. Of course, you know, you would choose capital models through the cycle, and it was a very conscious decision to move to F-IRB because essentially the old IRBA, advanced IRBA, as you remember, is essentially not suited for low default portfolio. That's I think why we and others moved, you know, from an IRBA approach in our case to an F-IRB approach. We have to look at that on through the cycle basis. On and through the cycle basis, the F-IRB from our point of view is advantageous.
Right now, you know, at this part in the cycle with the few digital events that we've seen, you know, it is not. As I said, Domenico, what we always have to bear in mind, the pro forma numbers that I gave, right? It's adding everything together. U.S. CRE, U.S. Residential, the acquisition that will happen, of course, no modification effects, including, as I mentioned that of course, digital, you know, event one can also flip into, you know, the other side, for example, for these countries. Lastly, what would be the RWA effect? You see that on this table that we provided on page 27.
At the end of the day, from my point of view, the very key message of that slide is that for the vast part of the portfolio, 75% portfolio that we have in the F-IRB, you know, the green dots that you see. You know, the actual loss rates are far, very far below the hurdle rates. What we try to illustrate there, that currently we don't foresee at all that these countries that you see would move into such a digital situation that we've experienced, for example, in the fourth quarter with Poland, Finland and Austria. You can see how far they are away from the 4.5%.
Yeah. Helpful. I was asking that just to assess the worst-case scenario. Just a quick follow-up. You mentioned that the banking supervisory authority of respective countries collect the data and then they update it during the year. Is that an annual exercise or does it occur more frequently? Just.
Typically annually.
Annually. Okay. Thank you.
Thanks a lot. Moving on to the next question. The next question comes from Jochen Schmitt from Metzler. Please, Mr. Schmitt, over to you. Mr. Schmitt, can you hear us? Hello.
Yes. Thank you. Good morning.
It took some time until I got unmuted. Thanks. Good morning. I have two questions, please. Firstly, again, on the CET1 ratio, your new target of above 13%, how much of this change versus previously was driven by the SRT, and how much by the possible changes in regulatory treatment, which you mentioned on page 27? Or to ask the question in a slightly different way, if the pro forma CET1 ratio, which you mentioned, were to realize, would you possibly again review your CET1 ratio minimum target again? Secondly, very briefly on the EUR 40 million fee assumption for Deutsche Investment in 2026. What is the pre-tax earnings contribution which you expect from that? Thank you.
Thank you, Mr. Schmidt. Good to hear you. Thanks for having you around. Let me take the 2 questions. Let me start with your question on CET1. The strategic adjustments around the minimum level is not driven by the capital regime under which we are reporting. It's driven by risk profile of the firm. I think we have outlined that always, yeah, in the calls and have said, originally we set it at 14%, now we are moving it to 13%, and that is purely driven by the risk profile of the portfolio. When we were at 14%, we had still a much higher position on the U.S. portfolio, which we now have completely de-risked from our perspective, or nearly completely de-risked economically.
We have also shielded our development portfolio next to our strategic position to focus on the European core markets, most of which, you know, you see on page 27 where we have allocated and we are focusing on those markets. Overall, strategically, the steering of the capital levels for the firm, for us, it's not driven by the capital regime, but it's driven by the risk profile of the portfolio and how that portfolio behaves through the cycle. I, you know, would like to reiterate what Marcus said, yeah. It's a 13% through the cycle, we all know here that commercial real estate markets are volatile, yeah. That's a reflection on the 13%.
With regard to your second question on the Deutsche Investment Group. We would provide, of course, way more detail when we communicate on our quarter one figures. There is where we first time will provide way more detail on it. For 2026, it's a profit before tax of around EUR 4 million. You will have to deduct then, we will provide more details on that. The PPA, the purchase price adjustment as well. You should look around EUR 3 million for the Deutsche Investment Group for 2026.
Okay. Thank you.
Thank you very much. The next question is from Corinne Cunningham, Autonomous. Please go ahead.
Good morning, everyone. Thanks very much for letting fixed income people speak on the call. Thank you. Just a couple of quick clarifications and a few questions from me, please. When you said the 13.3% assumes the whole book moves to standardized, the calculations seem to suggest that that would include the U.S. moving to standardized and the acquisition of DIG, but not all of your core European lines of business.
Yeah.
Can I just confirm that's the case?
What I said was the whole U.S. book. Meaning the commercial real estate book, which is in detail described on page 27, but also the very limited residential exposure that we have that is also subject to a similar but slightly different regime and the same principle. With that, in principle decision on wording of the EBA, we assume that we will lose the preferential treatment for LGDs for both the commercial real estate and the residential portfolio in the U.S. The total U.S. portfolio.
Thank you. That's clear. Just you mentioned on the dividend policy, 50%, distribution policy. Is that expected to apply to 2026 or not until you get to the end of your planning period?
It is, Corinne, thanks very much. Thanks for having you, yeah. Good to hear you. It, it applies for the year 2026 and the coming years. Yeah. That's the dividend policy-
Okay.
that we have set. Yeah. It's for the future years that we want to deploy and have this policy in place.
Thank you. The other question was about the way the SRT is working in the U.S.. Can you explain why it doesn't help you with the change from FIRB to standardized? Given that you've now got, you know, fairly chunky first loss cover, why are you not protected against that change out of FIRB in the U.S. portfolio?
Can answer that in two ways. First of all, not our entire U.S. portfolio is covered under the SRT, so there are remaining pieces and as well, the 5% slice of the SRT portfolio is not covered. Yeah. You will see that effect. The second point, Corinne, I would make is that the SRT does provide protection for the change in the regime. Yeah. However, the loss of the preferential treatment, of course, reduces, yeah, the positive effect that we mentioned of EUR 1.1 billion. It doesn't re-remove it completely, yeah.
The other offsetting elements that you see when you look at the quota of 135, you need to bear in mind the portfolio components that are not yet in the, or that are not covered by the SRT. I hope I was clear there.
I appreciate on. Yeah. The bit that's not covered, totally get that. The rest, is it just the senior layer that's being hit or basically the SRT is giving you less protection than you'd budgeted when you set it up?
I think the overall structure, the way it works from a capital regime perspective, Corinne, on the SRT, you cannot separate the senior and the mezzanine. You need to look at the entire capital structure, the entire capital structure defines the capital that needs to be put aside under the respective regimes, be it FIRB or standardized. It's not simple saying it is to be deployed on the unprotected side. It needs to be deployed on the entirety of the portfolio, the amount of capital that you have to put aside depends on the structure at the point in time.
As you know that this structure, once it starts winding down, is also starting to shift and change, and that has always an impact on the respective capital that you need to put aside.
Thank you.
Not a very straightforward mechanism, yeah. The mechanism of how to deploy it, I think there is clearly defined rules, yeah, of how the structures need to be taken into consideration when calculating under the respective rules.
Okay. Then maybe a more fundamental question about the revenues. Your revenues, you're targeting to basically increase them by a third. What are the main building blocks of that? I know you talk about obviously the cost of the SRT should fade away, but that's still a very significant revenue build with a flat loan book. Is it based on increasing interest rates? Just very keen to hear how you would expect to build to that EUR 600 million revenue number. Thank you.
Yeah. I would, Corinne, you know, I would start with that, and I would kindly ask Marcus-
Yeah.
To chip in as well if I might not touch on all the aspects. I would probably, Corinne, draw your attention for that on page 30, where we have the walks on the operating income side for the respective business units to 2026. Those walks give a good indication in the direction of travel that we are going for the year 2028. First of all, on the Real Estate Finance Solutions business. You see already in 2026 positive impacts from the rebuild of the book. Yeah. Putting more profitable new business on. Yeah. Substituting less profitable business. Yeah. You see that here with 15 plus 35 in the range.
You know, take that as a consistent rebuild of the book because our back book of EUR 27 billion still has something like EUR 20 billion in there, which you know, will come due over that period and will be replaced by more profitable business. That is one driver. The second driver to it, and you referred to a flattish book, is that of course we want to also substitute and reduce our non-performing loans. Look at the U.S. at the moment. The entire U.S. book to 2028 is more or less going to disappear, including the non-performing loan side, but also on the rest that gets substituted with more profitable and interest income producing operating income on that part of the book. A lower NPL book is supporting this trajectory as well.
The third layer on the Real Estate Finance side is definitely a more efficient liability and equity side. Yeah. There is funding support coming in. Marcus has outlined on the funding page in which direction the funding costs are going, and this gives us a tailwind there as well. Yeah. Those are the key levers. Next to that, if you drill further down in reps, I could also mention of course, we are diversifying in our portfolio. Yeah. We are taking more managed properties. Yeah. Hotels, student housing, those asset classes on our books. They provide for a better risk return profile compared to other asset classes. Yeah. Most notably the office portfolio, which will more decline over time. Yeah.
There are multiple levels that all pay into improving the operating income in the Real Estate Finance side. Paying attention to Real Estate Investment Solutions. The growth here clearly to EUR 7 billion-EUR 8 billion of assets under management is literally coming from the EUR 3 billion-EUR 3.5 billion that we have when you look into Real Estate Investment Solutions for 2026. It's substantially adding revenues there as well. We are building out our Originate and Cooperate business. There is clear anticipation of fee income growth for Real Estate Investment Solutions.
The combination of both of those elements next to the fact that the negative impact from others that you see on page 30 is going to disappear because it's a lot of one-offs that we had in 2025 that are not coming back. That gives a consistent growth of operating income towards the mentioned EUR 600 million in 2028.
Okay. Thank you. Just on the rate assumptions behind that, do you just assume current rates apply?
Yeah, correct. Yeah. As far as current rates apply, we assume a moderate bias for rates to come down on the short end, but rather assume that rates in the middle and longer part of the curve would stay or slightly rise, given funding agendas of governments, et cetera. That's basically the assumption. Reasonably steep curve, but no, you know, major impulse, you know, for the income as such. However, of course, as Kay mentioned, if you, for example, look at the equity side, et cetera, you know, interest rates going stable in medium term and term means of course, that investments that you make are positive yielding and not any more 0% yielding if vintages from the low interest rate phase basically gradually wash out of the system, right?
That's essentially the effect.
Great. Thanks very much.
Thanks, Corinne.
Thank you also from my side. The next question is from Sharada Patel of Citi. Please over to you.
Hi. I've got two questions. If the numbers are reviewed annually, do you know when the next review for Poland and Finland will be? The second one will be just some more explanation around the EBA's position on the U.S., 'cause it seems like the market loss rate is below the not, 0.5, that kind of threshold. If it's not equivalent, is there kind of a different benchmark number that they're comparing it to? Or is there, you know, a different data source that they can refer to and do find equivalent? You know, Oh, fuck.
Mm-hmm.
Hello, can you hear me?
Yeah, yeah. We hear you. We can hear you.
Sorry.
We were just waiting whether there are more questions, right? We wait.
Yeah, sorry. Just finally, you know, I just wanted to know, you're expecting that this U.S. change will come in the first quarter. Are there any changes kind of later down in the year if they can't find an equivalent data source that could mean that is reversed? Thank you.
Thanks, Sharada, and thanks for your questions. Let me take your first question on the technicality. The national competent authorities would have to, by law, communicate latest by the 30th of June of the following year, the loss rate that triggers the treatment. Yeah. That's the law. Yeah. The reality is that we are continuously monitoring publications, and they can also publish in between. Yeah. So that is, you know, there's on the one hand side, the way it should be, and there's on the other hand side, the way it happens. Yeah. By matter of fact, we are monitoring regularly because as a Foundation IRB bank, we need to the respective published levels and would then respectively apply them once they are published.
On the U.S. data, look, the U.S. does not have the same type of hard test and equivalent LGD regime. Yeah. As we all know. Yeah. Therefore, by matter of fact, they do not publish exactly the same data to comply with a European rule, set out in the CRR. Yeah. For that purpose, equivalence should be and can be applied. Yeah. By matter of fact, looking into that, the conclusion of the EBA, if you, if you read that, is that there is no such data that would exactly cover the requirements of the CRR. Yeah. Therefore, you know, Also stating that what is published and could be applied to, is from their perspective, limited able to apply. Yeah.
And hence, you know, their conclusion that for the U.S., yeah, despite the U.S. being a regulatory regime that is deemed by the European Commission as an equivalent regime, yeah, the level of data and information that is being published is used by the EBA is not sufficient for applying the respective calculation that we have been applying in the past. There is a hell of a lot of data published in the United States, as we all know. Yeah. It's the country with most of the statistical data. Of course, they do not publish 100% according to European rule regulation.
Okay. Thank you. Why is this change only happening now? Obviously, you've been using FIRB since January 2025.
Yeah. Look.
Yeah.
Look, I mean, perhaps two things. Just to your earlier question, Sharada, and for that reason that Kay and I explained, you know, the 26 basis points that we compute do not matter because at the end of the day, the decision is in principle, in irrespective of the computation. This is of course not meant to PBB. It's a clarification that the EBA has published to the market. In principle, it's public, and it has come out now on the back of a question that was raised and now they've been clarifying that point to the market in general. It's completely irrespective of PBB per se, right? This is a clarification to a standard.
Thanks a lot. Sharada, do you find your question answered?
Yeah, it's okay. Thank you.
Okay, perfect. Thank you very much. The next question is from Daniel Covey, Goldman Sachs. Please go ahead. The floor is yours.
Good morning, thank you for taking my questions. These are kind of just follow on from what has already been asked. Just Domenico answered, and I'm not sure if you gave a full answer to this, but just given the volatility that you're seeing in your RWA measures of capital at the moment, if you wanted to move to standardized, could you actually do it? We've seen quite a lot of movement in your CET1 over the last couple of years, which is obviously, you know, the moves are understandable, but if you wanted to move to standardized, could you? Just following on from Corinne's question around the SRT and its impact on the potential impact from the U.S. If this SRT was not in place, what would have been the capital impact there?
I think there's going to be a decent bit of confusion around why that doesn't protect you a little bit more. Just finally, just on Deutsche Investment, I know you say EUR 40 million of revenues. Could I just get the cost number that's coming with Deutsche Investment as well?
Yeah. Daniel, thanks. As well to you, welcome. Thanks for your question here in this round. To your first question, moving to another capital regime, yeah, is first of all regulated under the respective rules that have to be applied for banks. In general, you know, it is a process that need to be approved by ECB. Yeah, so it's not on us to jump around, yeah. Again, you know, repeating and reiterating or making the focus of what Marcus said, yeah. What we have been seeing, and you said that over the last years in terms of volatility, that is by matter of fact, a reflection of the foundation approach, yeah.
We call that the procyclical nature of it, and to a degree, the digital effect of being above or below a threshold for an entire portfolio without reflecting on the individual performance of the bank, yeah, is one of the reasons. When you consider where the market has been moving, and we are talking that real estate markets now on low levels being stabilized. What you see literally by matter of fact, we are moving in the cycle, through really a low point and a hard point, yeah. You know, considering the capital regime, you always need to look through that. You need to look through the cycle as a whole.
The short answer, you know, I gave it a little bit longer because of the consideration that I expect behind your question. The short answer is we are not free here to jump around on capital regimes. Don't view it as a sloppy. I see Marcus smiling at me. Don't view it as a sloppy answer. Yeah. I want to be clear, given that that question was asked twice, Daniel.
Yeah. No, I understand, like the capital itself isn't moving. Your leverage ratio is obviously in a good place. I was just wondering.
Yeah. Yeah. Yeah. That is a bit the situation that we also on the respective page on the capital side, wanted to give reflection. Yeah, you see the de-risking of the bank, the de-leveraging of the bank, also reflected, I think well in the leverage ratio and how the leverage ratio has developed. Yeah.
Just around, had the SRT not been in place, the impact of the U.S. portfolio of 135 basis points, what would that have been?
I don't have the number around Daniel, but what I can say it would be, of course, higher. Yeah, because there is a mitigating effect by the SRT, the effect would be even higher. We do here benefit from the de-risking process, of course. Overall, by the way, we also benefit from the repayments that we got on our performing book, as well as the reduction in our NPLs. The entire exit of the U.S. in itself mitigates, of course, you know, the impact. The SRT standalone, of course, has a mitigating effect as well.
The final one was just on costs in Deutsche Invest. I know you said EUR 40 million of revenues. I know you said costs stable across the bank, but I wanted to check what the costs were for Deutsche Invest.
The cost for Deutsche Invest, you know, I think, when we said around EUR 40 million for 2026, we also said around EUR 4 million of profit before tax, before the PPA effect. The delta of it, you know, roughly is the cost range that you have. You are around EUR 35 million of costs that you have in that business.
Okay, perfect. Thank you. Also thank you for taking calls from the credit side. Much appreciated.
Yeah. Thanks, for raising calls, Daniel. Thanks for having me around.
Thank you very much also from my side, Daniel. The next question is from Paul Noller, Commerzbank. Please over to you.
Hello. Thank you very much for taking my question. I would like to quickly go to the most recent events. You mentioned that you are guiding for loan loss provisions in 2026 of between 25 and 30 basis points. I don't assume that takes into account the recent rise in energy prices. I would be curious to see your view on if we are now looking in Europe at a protracted increase in energy prices, how that might impact the debt service coverage ratio, specifically in your European REST portfolio. I'm thinking here about hotels, logistics, and what effect you think that might have down the road on risk cost in 2026.
Paul, thanks for your question. I mean, first of all, let me clearly state that we have no active business whatsoever in the Middle East. I think that is one thing that should be said. The impact, and you alerting to that is more an indirect impact rather than a direct impact, that we will have to consider. You know, whilst energy prices is the one precise one overall, I think one could sum up it will be inflation. Inflation on the cost side and in particular on the service properties will have an impact.
The experience that we have, you know, when you consider going back to the Ukraine war, yeah, and the energy price rise that we have had. I, you know, it feels awkward to compare two wars with each other, yeah. That it's, you know, to clearly state that. Take that as an example, you know, we have the experience of those cost developments. Of course, one could say there have been mitigants, and one could read now as well, if it gets completely out of normality arises, then there will probably be additional support coming.
Of course, there is a higher pressure on the cash flows that are coming, but from the experience that we have been seeing, that is within the range in our portfolio of what we guided for in terms of the cost. Also stressing the fact that the hotel portfolio, take this as an example, is only 2% of our portfolio. We are not that heavily involved. We are just going into and expanding into it. We can take those considerations, of course, in when taking new loans on our balance sheet.
Thank you.
Thank you very much. Dear ladies and gentlemen, at the moment, there are no further questions in our Q&A queue. Last call, please. Please press nine and the star key if you have a question or a follow-up question. I repeat, the combination is nine star. We will wait a couple more minutes. Nine star is the combination, but at the moment there seem no more questions to be incoming. With that, thank you very much, and I'm handing the floor back over to the host.
Thank you very much. Thanks for the exchange. Thanks for the questions. In particular, Corinne, Domenico, Sharada, Daniel, thanks for your questions, and looking forward to have you around in our next call. If there should be more question arising, which would not be unusual, you know, our investor relations team, Michael Heuber, Axel Leupold, they are available. Please reach out and otherwise, I wish you all a good day. Again, big thank you also in the name of Marcus, for having joined our call. Thank you very much.
Thank you.