Good morning, ladies and gentlemen, and welcome to the Deutsche Pfandbriefbank AG conference call regarding the third quarter 2023 results. 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, Andreas Arndt.
Yeah, good morning, ladies and gentlemen, welcome to our analyst call regarding PBB's third quarter and nine months results for 2023, which follows the first set or first release of figures, which we announced and published already last week. I will walk you through the key developments in third quarter with a particular focus on risk provisioning and the US portfolio, and we'll try to give you an outlook for the full year for 2023 and beyond.
After that, I will be happy to take your questions as usual. Before going into the slides, please allow me for some summarizing comments. We continue to navigate in a particularly challenging environment, given the sharp increase and still high interest rates. There's still too high inflation, the geopolitical and economic uncertainties, as well as the structural changes in commercial real estate markets, which all seem to take more time than expected earlier this year.
Just to think about the structural challenges around the new work or remote work and ESG, which are the key words here. All this we reflect in a sizable increase in risk provisions in the third quarter, and indeed for the entire second half of the year 2023. We, however, maintain that PBB is and remains overall well-positioned, but even though focused on prime and core, we cannot escape from some of the individual and singular high dynamics on asset quality in certain areas and asset classes, especially in the US office segment.
As currently, only very few transactions take place, and present offers are strongly driven by opportunistic investors, the so-called bottom fishers. We have, in some cases, to account for decreases in expected market values that are derived from low bids of comparable assets, which cannot be ignored, even though one could question the sustainable fundamental valuation. Thus, we have increased our total LLPs from EUR 21 million for the first half of 2023 to now EUR 104 million for the year-to-date, third quarter year to 2023 figures.
But this is based on a revolving, ongoing, and thorough portfolio review, and covers amply the cases we know. We also have built in a further amount for cases we do not yet know, we have not yet identified for fourth quarter.
Taking this into account, taking into account the overall difficult times in commercial real estate, and taking into account that the stabilization of prices will only come second, first half 2024, we decided to adjust the full year guidance for 2023 to EUR 90 to 110 million, with a decidedly more positive view and outlook towards 2024, where we see the bank, subject to risk situation, of course, back to a PBT level of EUR 200 million, and on track to move towards a PBT target for 2026 or EUR 300 million, as announced earlier this year.
This implies, as mentioned, that we invest, in the fourth quarter 2023 PBT, substantial amount of further risk provisioning and further invested expenses for our strategic agenda in 2026. In short, the structural downturn in certain asset classes, notably the US office, leads to some value correction on some selected individual cases, which were beyond our expectations, which are, which are amply provided for in third quarter and fourth quarter. While overall portfolio quality remains strong.
We remain profitable for third quarter on isolated basis for the nine months and expectedly full year 2023, with still significant profit, as our revised guidance shows. The operating trends remain intact, in particular, NII, after weak show in the first half year of 2023, has improved markedly and expected to continue strongly also in the fourth quarter, 2023. We remain fully on track to deliver on 2026 targets. That sort of turns around to slide number four. As mentioned, due to increased risk provisioning and substantial business invest, we adjust our PBT full year guidance for 2023 to EUR 90 to 110 million.
This is based on increased LLPs of negative EUR 104 million for the first nine months in 2023 and anticipate a further noticeable fourth quarter addition to LLP, potentially including a management overlay, which remains to be seen, caused by still dynamic market situations.
Thus, we follow our risk conservative approach in reaction to the ongoing weak commercial real estate markets, especially in the US However, given PBB sound financial strength, we are still able to deliver significant PBT of EUR 91 million for the first nine months, despite increased risk costs and substantial expenses to deliver on the Strategic Agenda 2026. As you know, we are calibrated on Basel IV since quite some time, and in specifying the Basel IV orientation, PBB intends to move to the so-called foundation internal rating-based approach, the F-IRBA, and has discussed this with the ECB.
After transition period in 2024, with somewhat higher risk parameters, we expect CET1 ratio to return to about 15%. We are in September, as we speak, at 15.2%. After implementation of Basel IV in 2025, and here, to inform you, ECB informed us on Friday, and probably also other banks, informed on Friday that they expected the implementation of Basel IV fully-fledged by 1 January 2025. This will provide for three things.
First of all, we have opportunity to move to the F-IRBA, which is and will be the most preferred and most suitable standard for low default portfolios. It somewhat anticipates, for the interim, parameters. It somewhat anticipates market-related changes in parameters in current market environment. And third point is, it will lead to an overall more stable regulatory capital ratios in future. Taking into account the challenging situation in the real estate markets, we assume that unlike in previous years, the special dividend will not be contemplated and will not be distributed.
However, the overall dividend proposal remains subject to the conditions of PBB's dividend policy and will be decided upon and communicated together with our full year results in 2023. All in all, as I already, already said at the beginning, we remain fully on track to deliver the 2026 targets with an increasing NI and NCI of 20% quarter-over-quarter. The portfolio growth stands at EUR 1.2 billion, with a continued margin increase on the business margin, plus 30 basis points.
A strong retail deposit growth, that's a plus of EUR 1.5 billion year to date, and significant cost cutting to set for delivery from 2024 onwards, going back to the levels of 2022. And in total, taking out costs to the tune of EUR 45 million until 2026, of which 80% is planned to materialize in 2025. On slide five, you see the operating and financial overview you're accustomed to. And that sort of should show you that despite and irrespective of LLPs, operating trends are intact and significantly improving.
The year-to-date new business volume remains solidly within guidance, which we lowered to EUR 6.5 to 8 billion earlier this year, amounting currently to EUR 1.7 billion in third quarter and EUR 4.2 billion for the first nine months, and as well supported by our actual new business pipeline. Gross new business margin stands at an elevated level of 200 basis points. The green estate finance portfolios further up by EUR 300 million in third quarter, thus showing a strong growth of, all in all, EUR 1.2 billion year to date.
We expect a further growth to about EUR 31 billion by year-end, with continued margin uplift. Going along with the further build-up of our cost-efficient retail deposit, which is also reflected in our NII and NCI development. Strong increase, as I said, in third quarter, to EUR 133 million.
That's 20% up QoQ, quarter over quarter. The full-year figure is expected at around EUR 480 million, which is well ahead of our latest guidance, which did stand at EUR 450 million. General admin is driven by expenses related to our Strategic Agenda 2026. As you know, 2023 is our year of investment on our path towards 2026. Year-end figures to turn out higher than initially expected, due to the business investments we still have on the plate, i.e., we will be coming out more around 260 or slightly below 260, where our former and previous estimates stood at 235. On LLPs, a few more words in a minute.
and all that together, despite increased risk costs and substantial investments into our Strategic Agenda 2026, we are able to deliver significant PBT of EUR 91 million for the first nine months and expect to remain profitable also in fourth quarter, while accounting for further risk provisioning on the conservative side.
Now, on page seven or slide seven, the usual overview on the P&L, which I will only address selectively. We are making good and even better than expected progress on the earnings side. As I always told you, that it will take some time to gain momentum on NII after digesting the loss of TLTRO benefits and floor income, which at that time we indicated as a negative EUR 70 million impact on NII.
Actually, we see even better development than we initially expected, with a strong uplift in third quarter and on the nine months year-to-date basis against previous year, NII and NCIs, that's only slightly down from EUR 358 to EUR 349, and we're catching up on that figure. This mainly reflects the Real Estate Finance portfolio growth, plus a significant uplift in portfolio margins. Increased level of new business margins since fourth quarter last year is now gradually contributing to the overall portfolio margin.
The positive momentum is strengthened by the favorable build-up of our retail deposit base. Also, Tier 2 related hedging instruments, which still did burden the NII in the first half, have now fallen away, which strengthens NII level going forward. Furthermore, we benefited from loan extensions and payment of past due interest, and as I said before, overall level is expected to stay high and grow further.
We said earlier this year that we aim at a faster rundown of our non-core portfolio, which is the now combined Value Portfolio and Public Investment Finance. Hidden reserves on assets and spread advantages on other issues did allow us for higher realization income of EUR 45 million, benefiting from sales from non-core unit, from our non-core unit, i.e., optimization of the Public Investment Finance and Value Portfolio , liability buybacks to the tune of EUR 24 million within this 45. And as you may not be surprised, prepayments is actually and currently not happening, is not the flavor of the day.
Net operating income was mainly driven by releases of provision for litigation costs in the third quarter. Those were what are referred to as reserves for old time-barred potential litigation claims regarding administrative fees and time-barred litigation claims around old, participation rights and other things.
Last line I would comment on, on this page is on the net income from write-downs, which are slightly up, reflecting regular depreciations and extraordinary full depreciation on the Capveriant, which, as you may remember, we discontinued in the first half of 2023. And of course, the increased investment spend on Client Portal and Credit Workplace as the key initiatives on the IT side, on the technical side, on the digitalization side, within our 2026 program.
Now, on Slide eight, the significant increase in risk revision is mainly driven by the strong dynamic in the US markets, especially the US office segment. What are the specific drivers? Now, in general, the market environment is highly challenging, driven by high interest rates, as I said, high inflation, several geopolitical and economic uncertainties, as well as structural changes. The US market is more strongly impacted than, for instance, the European, affecting, as I said, some individual loans and accounting for 80% of the new NPLs.
The problem, in short, is not an average 20% to 30% downturn in the market valuation. The problem is about specific individual cases in an otherwise strongly resilient segment of prime or lifestyle or Tier one assets, with only moderate change in valuation.
Which is confronted with a sudden significant discount due to idiosyncratic changes in either location quality. The most significant example of that is what happens or happened on the West Coast in San Francisco, Los Angeles, and partially in Seattle, where the CBD was on is is still occupied by homeless people or by the competitive and / or by the competitive situation, such as a new development next door, fully green lifestyle office building, which absorbs high demand for attractive office environment to attract people to return to office.
On the third point, structurally, the vicinity to traffic and commuting points, former less desired locations gained to the extent of being closer to the next train station or vice versa, and all that exacerbated by the specific syndication structures.
While the most actual and recent valuation, which the syndicate may have on hand, is meant to deliver an actual and recent and at the same time sustainable level of valuation. Pricing actually might be severely influenced by bottom fissures in times of low or no transactions. If a syndicate decides to go for immediate exit, the opportunistic route becomes the relevant case instead of the more pragmatic, realistic valuation case from a professional workout scenario or the repossession case, as you may call it.
So in short, the combination of various factors of structural changes in locations and preferences, such as newer remote work, green ESG factors, and so on, lead to a shift in appreciation of macro and micro locations and may, together with opportunistic price offers or fire sales and the specific syndication situation, lead to sudden and significant lower valuation than expected within the default values. But what is important also is two things. First of all, it's, it's a few cases, not a many. It's not on a broad scale, but it is where exactly this constellation of factors comes together.
The second point is the provision which we provide takes into account, in most cases, the more conservative side of the situation, i.e., if there are bottom fishers, if the leaning of the consortium is more towards immediate exit, those are the prices and those are the valuations which we assume. At the time of origination, all the US offices, which we did finance, were A properties in A locations. Now, with the structural shifts which I tried to depict and illustrate, some 5% plus 5% to 10% may be considered as a B location, at least temporarily.
Those structural and very select changes have led to a partially fast and steep value decrease in former prime properties, and at the same time, the short refinancing cycles in the US, together with a faster and more significant increase in interest rates compared to Europe, work on valuation levels in general.
However, we believe that 80% of the interest rate-induced cyclical market correction is assumed to have happened. Many ex-prime locations are likely to achieve prime status again in an expected market recovery. And that should not be sort of forgotten. On the flip side, on the other side of the coin, the market environment, as we see it presently, provides perhaps only a few, but attractive business opportunities based on already corrected valuations, but at a very favorable margin. Now, on slide nine, some further details on loan loss provisions.
I mentioned the figures, the risk provisioning significantly increased by EUR 83 million in third quarter and nine months, altogether EUR 104 million, altogether. Which was, as I said, primarily driven by already existing US office NPLs. EUR 95 million additions in Stage Three come from a limited number of individual cases.
The majority portion, i.e., EUR 76 million, are related to existing old office NPLs, i.e., NPLs, which were booked already before the third quarter, mainly derived from a decrease in expected market values based on low bids on comparable assets in a very weak market with opportunistic investors only. Individual situations are developing in parts dynamically, e.g., ongoing negotiations on restructurings or sales forces in complex banking consortium is the point in question.
With that, I turn to page or slide number 10, which I leave basically for you reading. I think that's the extrapolation of the figures which you know and revert to the NPL portfolio on slide 11. The key takeaways are for the third quarter.
Overall, NPL has increased by net EUR 241 million after some minor releases. The figure is made up by five cases, five new cases. There are three offices and three European cases, of which one is in Poland, and one is in France, both with minor LLPs. For the quarter, it totals EUR 1 million. Year to date, nine months is a $465 million gross increase in US loans, with $390 million net due to one removal and technical effects, bringing up the total NPL of US loans to $691 million.
This corresponds with Stage Three LLPs on 12 US loans in total, to the tune of $109 million, of which $9 million came from the first half of 2023, $18 million from the third quarter new LLPs, and $76 million from existing loans, i.e., loans before third quarter, with additional Stage Three LLPs booked in the third quarter. And 11 out of 12 properties in question are office, one is mixed use, retail, and office. Now, aside from the provisioning on the Stage Three, which amounts to $109 million, we should not forget that there is Stage One and Two LLPs, which are also being geared up, and $95 million are attributable to US loans.
On our US NPL portfolio, we saw a decline in property market values of, roughly on average, $41 million in the last 12 months, which we believe is adequately considered in our actual risk provisioning, both Stage Three and Stage One and Two. In contrast to that, European NPL loans represent the minority, i.e., five pieces at EUR 178 million in France, Germany, Poland, and the UK, with a total LLP Stage Three of EUR 8 million.
That shows also, I think, very clearly, the different degree to which the European markets and the US markets are being affected, and confirms again, the thing which we know since going to the United States, that the US markets see much more volatility in value development, much faster coming into the curve, but also usually going out of the curve.
So to sum it up, LLPs in third quarter mainly result from additions for already existing US NPLs, which so far, until half year 2023, have required no or only small LLPs, the so-called zero LLP NPLs. We are talking about a relatively small number of individual cases which have turned into NPL in nine months 2023. In total, 14, there are nine US cases and five European cases. Only certain singular areas are affected, and the overall quality of our portfolio remains high.
And that is something which you can also see on the next page, where you've been given a more general view on the US Real Estate Finance portfolio. The US portfolio has been reviewed in 2023 on a revolving monthly basis, with all revaluations are based on external appraisers, and again, being reviewed and looked after by internal appraisers as well.
There's not one external valuation, which has not been vetted also internally and measured and looked after. All in all, this resulted in property value decreases in the last 12 months of average EUR 24 million on performing properties, resulting in still moderate average LTV of 60%. An average EUR 41 million, as I just mentioned, on non-performing properties, value decreases are equally considered in Stage Three risk provisioning.
Office accounts for 80% of total EAD, and residential is making up for 16%, and the regional setup is in the East, 74%, which is mainly in most mostly New York, but also Boston and Washington. Chicago accounts for 12%, and the Western cities, the large gateway cities, also another 12%. All those engagements are in gateway cities with the usual characteristics about transparency and liquidity in these markets, which according to the situation, is hampered at this point in time.
The NPL, the percentage NPL of respective outstanding EAD in the East is 10%, whereas the other regions come in with 30% to 35%. And as I said, the West, the Western cities have a CBD problem with homeless people and rental overhang from the big techs. That sort of adds to the structural weaknesses of those regional markets. And Chicago is traditionally high in terms of vacancies, but now certainly at a much higher level than we have seen typically and traditionally before.
Now, the overall portfolio Real Estate Finance , sort of taking a view to, on, onto the total, is something which you find on page 14. In reflection of the current market environment, new business volume remained on rather low level, but slightly up to EUR 1.7 billion, which brings in a total of EUR 4.2 billion for the first nine months. This is fully in line with our expectations and based on a good pipeline, supports our recent guidance of EUR 6.5 to 8 billion.
This comes at a continued elevated margin of 200 basis points, i.e., 30 basis points up against last year, while supporting the margin lift up in the portfolio and our target in 2026 to lift margins up by 15 basis points. So we are actually better than that.
The Real Estate Finance portfolio volume further increased by EUR 300 million in third quarter and EUR 1.2 billion year to date, to now EUR 30.5 billion. Supported by remaining low prepayments, while extensions are naturally higher, we account for 40% of that in the total figure. As we expect even stronger new business in fourth quarter, Real Estate Finance portfolios should increase further by the year-end to at least EUR 31 billion. A quick look on the new business and portfolio distribution.
All in all, we stick to our focused and selective approach, with presently low shares of business in the United States and the UK However, what we also should keep in mind is looking ahead, and in the longer term, we expect the US market, as I said, to provide attractive opportunities in current market environment.
This makes sense where new business is based on already corrected valuations, attractive margins with tight risk parameters and contractual parameters. Now, that takes me to slide 16. Despite the recent valuation adjustments, the average LTV on the total Real Estate Finance portfolio stays solid at 52%, and the focus remains on prime properties in core inner city locations and conservative risk parameters.
We continue to closely, intensively monitor our portfolio in a timely manner, as I said, and as I described already. So, I'll repeat myself a little bit, but I think it's important to make that transparent. So, the first one is, in doing so, we do not only rely on external appraisers but also have our own real estate appraisers. In this respect, it has to be noted that the appraisers are designed to be both timely and sustainable, but in times of only a few transactions happening in the market, valuations might be influenced by opportunistic quotes of the so-called bottom fishers.
These have to be taken into account when a property sale is more likely than a price-preserving workout. This is what we currently observe in a few but important cases. And for those we know, we accounted for in third quarter with significant risk provisioning and for further, so far not specified or identified cases, we have anticipated a further substantial amount in our full year guidance for the, as part of the fourth quarter.
As far as risk models are concerned, we still expect further valuation adjustments for PBB's portfolio in fourth quarter and in 2024, which are taken into account in our model parameters for stage one and two. We increased the risk parameters for US office portfolio valuation-wise to 10%, another 10% on top of what we have already provided for. We've increased the same figure for European office on 3% and total office portfolio by 4%.
Now, as every bank, we also have a funding side, which so far works very nicely. The funding activities reflect lower overall funding requirements due to lower new business volumes, increased substitution of senior unsecured capital markets funding by retail deposits. But higher spreads for senior unsecured and Pfandbriefe are likely to stay on for some time.
Retail term deposits come in almost at zero or negative spreads and effectively counterbalance higher overall costs from market funding. Our liquidity position remains comfortable with the LCR of 218% and NSFR of 114%. Now, that brings me to page 19 or slide 19, with a few more details on retail deposits, which I can make short because it's rolling according to plan. 35, 34% up year-to-date, and even 84% up since 2022, with now almost EUR 6 billion accounted for by the end of September and well above EUR 6 billion as we speak.
As mentioned, retail deposits come at a favorable condition compared to unsecured funding, and this supports our NII line significantly. Term money, and that's, that's good, that's what we want. Term money accounts for 85%.
This money, this money cannot be called earlier and provides for higher stability and planning reliability. Average term stands around at around three years, thereby is matching nicely the asset side duration. Slide 21 brings me to capital and risk models. I keep it rather short on third quarter capital ratios. It should not be of a surprise that in current market environment plus portfolio growth, we see an overall uplift on our RWA.
All in all, relatively moderate, but expected loss shortfall deducted from the capital position then results in a reduction of CET1 ratio by 80 basis points to 15.2. And a word about risk models. Since some time, we calibrate our risk models on Basel IV levels, as we have discussed with you many times.
To further specify this approach and to make it concrete, we will apply the so-called Foundation Internal Rating-Based Approach, the F-IRBA, based on Base IV implementation for our core portfolio. Base IV is to come on the first of January 2024, as ECB circulated last Friday, and with that date, we should be in the position to apply the new standard. We would expect similar capital levels as we show today, i.e., around 15%. And one of the many advantages of turning into the foundation approach is we have a simplified model set up with significantly less work and hassle, with a standard LGD to be applied.
The other advantage is, I think, the higher regulatory model acceptance as foundation approach seems to be the preferred set for low default portfolio in view of or from the perspective of the regulators. Until the new rules come into effect, and in order to avoid costly and tedious adaptations to present standards, i.e., the old foundation approach, we will transitionally apply standardized parameters, which may lead to a temporary reduction of CET1 ratio. However, we remain well above current regulatory requirements, of course.
With that, we continue to follow our risk conservative approach. We assume that due to ongoing difficult situation on the commercial real estate markets, this adequately anticipates a market-related change in parameters in the transitional period, i.e., in 2024.
I think that's safe to assume it would provide PBB with a higher stability on our regulatory capital ratios going forward. Now, to close the presentation, I come back to what I said at the beginning on the strategic agenda as a clear perspective onto what we need to do in difficult times to restore the ample profitability of the bank to return on equity which suffices capital markets requirements. And therefore, as I promised to you earlier, that we give monitoring and transparency on the initiatives on a regular basis.
I would go through the next two or three slides briefly to show you where we are, how we do on this in terms of project work, in terms of program work, and in terms of operational development. We are, as I said at the beginning, fully on track to deliver 26 targets.
The portfolio, the Real Estate Finance portfolio growth, the system works as designed. Lack of prepayment supports portfolio growth. The portfolio, as I said, is up by EUR 1.2 billion. New business pipeline supports the full year guidance, and thus we remain on track to reach our 26 targets of about EUR 30 to 33 billion portfolio size. The second point in focus is the margin increase on our core portfolio.
New business margin stays at 11, stays at elevated level of 200 basis points since quarter four 2022, which is, as I said, 30 basis points up and is supporting the, the strategic target that we, on a broad basis, increase our business margin by 15 basis points across the board. Retail deposits, we saw that a few minutes ago, but the increases I'm not going to repeat, but that's rolling according to plan, and that sort of directly transforms into our earnings, NII and NCI, as I have laid out already when we talked about NII and P&L.
The general admin is a necessary prerequisite for getting these investments done. As intended, 2023 remains the year of investment, with substantial investments in our strategic initiatives. We will run a bit higher than initially planned. As I said, 260 is more likely, or somewhat below 260 is more likely than the initial planning. However, our cost-cutting program is set to deliver, which you see from the next page, our operating expenses and, the development over the next two or three years.
Our significant cost cutting is set to deliver from 2024 onwards and is aiming at going back to 2022 level in 2026. Overcompensating for operating uplifts from new business lines until 2026. Important, what I want to take you along is, to remember, the cost cuttings are largely predictable time-wise and in terms of amount as relating to clearly defined measures. 80% of the cost reduction, which totals to EUR 45 million, is planned to materialize already in 2025.
The agreement with the Workers' Council was signed last week and confirms our previously communicated target. Further uplift in personnel expenses from new strategic business lines is expected largely to be compensated by process and IT measures, such as the digital Credit Workplace . On the non-personnel, the start-up expenses for strategic measures expected to fall away in the course of the next year.
The new IT setup is in the state of finalization. The contracts are more or less concluded and will be signed shortly, and will bring a significant cost reduction afterwards to the bank through insourcing, through new IT provider and other measures. The write-downs in 2023 are related to office space optimization, which are expected to result in future positive cost effects, in addition to immaterial assets, which are to be reviewed in the light of the new strategy.
To sum it up, ladies and gentlemen, PBB proves operating resilience in most challenging market environment. Given PBB sound financial strength, we are able to provide for adjusted but significant PBT full year guidance for 2023 of EUR 90 to 110. This is despite significant increased costs, with further noticeable anticipation of a fourth quarter addition, potentially also including a newly to be allocated new management overlay and substantial savings of EUR 45 million to deliver on Strategic Agenda 2026.
All in all, we are fully on track to deliver 26 targets by looking at the increasing NII portfolio growth, margin uplift, strong retail deposit growth, significant cost cutting, to deliver from 2024 onwards. With that, I close my presentation. Thank you very much for your attention, and I'm happy to take questions.
Let me now take over to the Q&A session. Please note that only quality analysts are allowed to take questions in this... to ask questions in this conference. The first question comes from Johannes Thormann, from HSBC.
Morning, everybody. Three questions from my side, Johannes Thormann, HSBC. First of all, the NII was nicely up, so far better than planned, but fee income was is down on a nine-month view, despite all your new projects. So the previous revenue planning was really bad. How can you say that you're on track to reach the 2026 revenue targets? That's my first question.
Secondly, in terms of OpEx, I would doubt that the 290 is a slight increase versus 260. We see another year of restructuring. We see more of those one-off charges like in the previous years. Should we model continued one-offs into your cost base nowadays, or what would you consider your underlying costs from 2024 onwards, as you just indicated, it was slight minuses, but but no real numbers to it.
Last but not least, on your lending policy and risk costs, we saw probably also nearly as high charges as at your peers, but you never recorded the margins they recorded. It seems like a dilemma with your syndicated loans that you were trapped and now forced to do impairments. Do you plan any changes to your lending policy? Thank you.
Okay. Now, Thomas, thank you very much. On the NII side or the fee income side, there are two things to be considered. First of all, in times where we have less true and real new business, we have less potential to leverage and to generate fee income. So, that sort of comes with the market situation. The real increase in fee income, and we should carefully distinguish between fee income, which comes with the lending business, and fee income, which comes with provisioning business, provisions, such as in investment management.
That is still to come in the next two to three years, which we want to build out and want to achieve a share in total NII plus provisions of fee income to the tune of 10% to 15% as we go along. Now, we started that, the team is there. We expect first placement of a debt fund in the first quarter of next year and we will gradually build out the fee income. So those are the two elements which need to be considered when we talk about fees. The other one on OpEx, I do agree with you, the increase is not small. It's significant because the investments which we bring on the road are significant.
You were asking for the underlying cost. I think the easiest indication is what we said about the level we want to reach, and that is, in absolute terms, the 2022 level of EUR 224 million general admin expenses, plus the Alpha. So, and that basically translates from a total cost perspective into a decrease of cost against 2023 levels of EUR 45 million plus, EUR 45 to 50 million. And that is significant.
That's a 17% decrease. I don't know many places and many banks which showed such a restructuring exercise within two years or three years, basically two years, because we expect 80% of that being done by the end of 2025.
2024 will be sort of quiet in terms of reduction, because, A, as you know, the measures around personnel come into force only during the 2024, 2025 period. So there's a gradual movement. And the other point is we are exchanging the entire IT, the entire hardware and part of the software in 2024. And we have need, that's a technical necessity to run the old system and the new system in parallel, and we will have to pay for that in 2024. So we will see some cost reduction in 2024 already, but not to the tune, as you may wish for. So once that is out, 2025 brings the big step down in terms of cost and cost development.
When I say it's fairly safe to forecast, the personal costs are being clearly identified and clearly allocated and being contracted by the Workers' Council in the so-called Interessenausgleich. So that's a set and agreed measure. And the alleviations and the cost cuts, which we expect to come from the IT measures, are also exactly planned and part of the overall service contract, which we are in the process of signing, and that's also locked in. So I don't say that's all safe and done.
There's certainly some measures which are still to be effected and to be implemented, but I would say by and large, the road is clear and is firmly set to achieve the cost cuttings, which I have tried to lay out. Now, on the syndication, what you said on the syndication trap, in inverted commas, I think there are two sides to the coin.
And obviously, we're looking at the not so desirable side of the coin just now. But the good thing about syndications is, when you go into a new market, you go with banks you know, banks who know the market and who take you along and give you the comfort of better market transparency and guidance in these markets.
And this is exactly what we did, and we did assume that to be the good approach, the right approach, also in terms of diversification of risk and reducing one ticket risk at the same time. And I would do it the same thing again. We have to go from syndication situation to syndication situation and make our judgments and set out our strategy on that as we go along. There will be no change in lending policy to the tune of saying we only do this on bilateral loans.
Which is, from a risk strategy, not to, with us anyway, because the size of the large institutional loans which are requested in the United States is to the effect that we probably would hardly suffice their requirements by taking the full piece, i.e., taking pieces of $300 million, $400 million, $500 million in a row. If we would do that, if we would have done that, we would have had a much bigger problem just from one case, and therefore, I think it is still advisable to go on a diversified way.
If you take the average size of NPL loans, you come up with a figure of roughly EUR 50 million, and that's much more digestible, also in terms of one-off hit which you may want to allow for your bank. So, yes, it is an uncomfortable situation, but I think it's the necessary outcome of otherwise strategic positioning of the business, which I fully agree with.
Okay, thank you. Just a follow-up question on your revenues then. So the increase in commission income is really a hope factor, because we see nothing from the investment business so far. And the second, probably more important thing is net interest income. What would you consider a good underlying level for the next years? The EUR 132 we are seeing now in the quarter or, or rather the like, a blended range of 120 coming from the EUR 480 you guide for the full year?
No, I don't want to sort of anticipate any guidance for 2024 at this stage, so that's why I'm a little bit cautious. But you will see a fourth quarter 133 coming up again. That's at least what our plan and our forecast says. And I would consider that as a good indicator to go into 2024. Unless we say...
Okay
W e need to reduce the portfolio or suddenly the margins all come down or things like that happen. But the adverse factors which we had, i.e., washing out the TLTRO with a negative outlets into the first half of 2023. The missing of floors and water, these effects, which did hamper with our NII results severely and significantly, those things are washed out.
Okay, thank you.
Pleasure.
Quick reminder, only quality analysts are allowed to ask questions in this conference. If you want to do so, please press nine followed by star on your cell phone. The next question comes from Borja Ramirez.
Hello, good morning. Can you hear me?
Yes, we hear you. Yes.
Good morning. Thank you much for your time and for taking my questions. I have three quick questions, if I may.
Please.
First, is on the non-performing loans. I would like to ask how you see the evolution going forward? Then the second question is, if you could please remind me on the collateral coverage of the NPLs. And lastly, I would like to ask how you see the NPL coverage, the provisions coverage going forward? I think the ECB's backstop would require a 40% coverage within three years, if I'm not mistaken. I would like to ask how do you see this going forward? Thank you.
Now, on the 40% backstop, I must confess that I don't have that with me, so we'll come back to you on that one. The other one, the NPL evolution. To start with that point, I would put it this way. I mean, we're talking about EUR 104 million now for risks which we know. And we said, there's a substantial amount to come for the fourth quarter for things we don't know.
Now, given these structural elements, which I described to you, there, there's no easy forecast, no easy prediction possible, as you would say, on a retail mortgage portfolio or retail consumer finance portfolio, where you say we calibrate that around some risk parameters, economic macroeconomic risk parameters, and do a forecast along that. It is very much due to the idiosyncratic situation which we experience... Now, but we have identified sort of potential candidates which may cause trouble going forward, and we have accounted for that or not accounted for that, the wrong word.
We've put a placeholder in our forecasting exercise for the entire year for fourth quarter, and believe that, based on that, that placeholder, based on that forecast, we should be in the position to hold on to the guidance, the adjusted guidance of EUR 90 to 110.
Now, how much that is going to be, in real figures for the fourth quarter, is something which I leave to your ingenuity and your calculation. If you would assume as a sort of pointer to that, if you would assume that our guidance of EUR 90 to 110 compares with EUR 90, which we have booked, as PBT in third quarter. The more likely assumption for the fourth quarter would be something around zero to come out with that.
And if you take a normalized quarterly result and take that figure as an indication where we would land in terms of additional LLPs for the fourth quarter, that should give you some indication of what we see coming along still this side of the year in terms of LLP requirements. Now, that's a sort of approximation which you may or may not find applicable. It does not say something about or anything about how much of that we would allocate to management overlay or not. So that's something which we look at by the end of the year and see what we can do in terms of the overall figures.
Now, the coverage ratio, if I remember correctly, the coverage ratio, however where do we have that? It is relatively low because what we see as a structure is that we have a couple of cases, a few cases out of the nine which we have built in, in third quarter. Yeah, no, that's... You were asking about the coverage ratio for the US exposure, I suppose. And, the coverage ratio there so is more on the side of 10% to 15%, if I remember correctly. Stage Three, 16% is the figure. I hope that answers your question.
Thank you.
Yeah.
Thank you very much. I greatly appreciate your comments and your time. My question was more, and so sorry if I wasn't clear. It was more on the collateral coverage.
Okay. Now the coverage ratio, which you're asking for is basically 100% because what we or the way we calculate is if the loan is 100, we hold a security and a collateral of 50, then the remainder, if it is a performing loan, it is 50 on the performing side or it's 50 on the NPL side. So NPLs are usually, not usually, but always, calculated in a way that the 100% coverage can be assumed.
Thank you. So if I understood well, your Stage Three loans in the US have a coverage ratio of 16%, 16 of provisions?
Yes.
The remaining 84% is the collateral coverage.
Yes.
Thank you.
The next question comes from Tobias Lukesch.
Yes, good morning. Also three questions or four from my side, please.
Hi, Lukesch. Hello.
Hi. Maybe just a quick one on the other income, this legal risk provision. I was wondering, you know, how big the amount really was, just for modeling purposes. Secondly, did I catch you correctly, that you were kind of indicating a EUR 200 million pre-tax profit for 2024 in your earlier statements? Thirdly, maybe touching on risk costs. I was wondering in terms of developments since you have EUR 2 to 3 billion, maybe you can remind us of the number and potentially also a bit of split regionally.
Do you see any difficulties here in terms of developments, European developments, maybe even DACH, potentially single names? I mean, you read various companies in the newspapers who basically stop these developments.
Very lastly, I was wondering on the equity Tier 1 capital, so it seemed to me that the equity Tier 1 capital basically fell throughout the year. Maybe you can give us an indication, you know, what other comprehensive income effects are, where the equity Tier 1 capital stands as of nine months, and where you expect that by year end. So we have an idea, basically, from which level then to calculate the further effects. Thank you.
To come back to your last point, you're referring to CET1 levels, right?
Correct. Yeah.
Yeah. Now, as I said, we are at 15.2. I mean, apart from recalculations around FIRB approach or whatever, we would assume that we hold that level roughly by year-end. So that's what the expectation is. Then you did ask for risk cost. I wasn't quite clear on that part of the question. Risk cost and development loans in Europe. Now, two or three remarks on this NPL situation in European loans. The amount of NPLs on European loans, which we did account for in the third quarter, is EUR 178 million. It's five new loans.
That compares to nine NPL loans in the European side for 2023, which amount to an additional NPL of EUR 465 million. So that gives you already a sort of indication where we stand in terms of risk cost, European territory or European region versus US, which does not come exactly as a surprise.
As I said earlier on, the US markets have always been seen as the more volatile one and more demanding parts. But they're quick in sort of building up a crisis, but they're usually also quick in resolving a crisis. Now, the European loans, the amount which we set against that in terms of provisioning is rather small. It's EUR 8 million altogether, and that compares with close to EUR 100 million on the US side.
So that gives you another indication about the, say, volatility of risk cost on this side of the Atlantic and the other side of the Atlantic. Now, what as far as development loans in Europe are concerned, we can say up until now, the situation for the bank is that we have no re-provisioning for development loans. So what we have left, which is not much, is all on current levels. All in all, I'm personally not so much worried about development loans and about trigger loans in Europe or in Germany for two reasons.
First of all, in general terms, the situation a couple of years ago, 10, 15 years ago, in the last crisis, when developments were abundant in the market, we have now a situation that actually much fewer developments are underway. If the market should pick up again, that's a supply which will be also picked up again fairly easily. The second point is, typically the amount of equity spent in or invested in such a development loan is typically much higher than it used to be in the past.
And the third point, from a sort of senior loan perspective, a first-class development, if it is correctly built and correctly seen through, in terms of valuation, as opposed to 20, 30, 40 years old existing building, can be much more attractive because it's a point of interest where people assume that ESG standards are being upheld, that people assume that is the right lifestyle investment being done.
It is attractive enough for employees to go there, and therefore, the really good investment, the really good developments, they will have the valuation in their own rights. So, yes, I know there are some problems out there.
We're luckily not part of that, but overall, I'm perhaps less critical of development loans than others might be. Now, the other point, the second question, so working the order from the back, backwards, whether 200 is a sort of guidance for 2024.
I think the way I've mentioned it was saying we were moving towards 200, but I would not give out guidance at this point of time. That's something to be done in the context of fourth quarter results and full year outlook for 2024. So I apologize if I've been a little bit too direct on that, but directionally, I think we should strive for that.
But in terms of concrete guidance, that's something which in three months' time, will be part of the conversation. Now, on the first point, I wasn't quite sure on that one, what you were asking for. I think it was related to other operating income, right?
Yes, it was the legal provision release, basically. I think you did not state the exact amount that would be helpful for getting the underlying of the quote...
We had...
Precisely.
First half, exactly. First half of the year, we had zero, and the third quarter we had 17.
Yeah, I do have these figures. It would be just interesting to get the exact amount.
Yeah, 17. 1 7.
17 for the legal provision release. That's the net number or the gross number of the release, basically, not just the net number for the quarter?
Yes. Yes.
Yep. Okay. And the final one, if I may. So on the dividend policy, if I understand you correctly, it's gonna be maximum the base payout ratio of the 50%, right? On the kind of net profit that you generate for the year. And, so the special div to 25%, is definitely cut. So, we are talking about 0% to 50% from the net profit for 2023 as a potential dividend payment next year.
That is by and large correct. I think it is understandable that in such a situation with commercial real estate markets being slightly in disarray, to put it this way, that prudence requires that we are also giving a signal out to markets.
And therefore, we said 25% is a supplementary, is an additional dividend, which we pay in good times. Times are obviously getting better every day, but are not so good just now. And therefore, we said we will forgo the 25%. And on the rest, as far as the base dividend is concerned, we will make decisions when it is time to make these decisions, and that's usually after fourth quarter results, and markets will take it from there.
Thank you very much.
Hey, Lukesch. Vielen Dank.
At this time we have no more questions. Therefore, I hand back to Mr. Arndt.
Okay. There's not much left to say. The only thing I want to leave with you is, thank you for the discussion, for your questions. I hope you're well, and all the best to you. Have a good day, to close on a German note. Thank you very much, and goodbye.