Aareal Bank AG
Q3 2014 Earnings Call Transcript

Published: 12 Nov 2014

[Executives:]

Wolf Schumacher – Chairman and CEO Hermann Merkens – CFO

[Analysts:]

Benjamin Goy – Deutsche Bank Britta Schmidt – Autonomous Research Philipp Haessler – Equinet Bank Dirk Becker – Kepler Cheuvreux Martin Peter – LBBW

[Operator:]

Dear ladies and gentlemen, welcome to the Q3 2014 Analysts’ Conference Call of Aareal Bank AG. At our customer’s request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions) I now hand you over to, Wolf Schumacher, who will lead you through this conference. Please go ahead sir.

[Wolf Schumacher:]

Dear ladies and gentlemen, I like to welcome you also in the name of my colleague, Hermann Merkens, to our analysts’ conference call, regarding the Q3 results. I will guide you through the presentation. Afterwards, Hermann Merkens and I like to answer your questions. It was a very positive, meaning, a very interesting quarter. That’s the reason that we put some highlight at the beginning of the presentation. First, the Q3 Group operating profit further improved to EUR 66 million. The main driver was a significant increase of the net interest income up to EUR 181 million. The full-year guidance increased after the strong Q3 results. The strong business trends materialized further, the range for the Group operating profits of EUR 420 million up to EUR 430 million is achievable. That means confirming concerning the fourth quarter, the range of operating profit of EUR 72 million up to EUR 82 million. If you see in background of our new business, and you see the results for the first nine months, that was the reason, that we increased the new business targets to approximately EUR 10 billion. Aareal passed the European Central Bank’s comprehensive assessment, asset quality review and stress test with very good results, with asset quality review net to only marginal adjustments of just 10 basis points as they came mainly from cuts. Furthermore, in our stress test values, our capital ratios clearly exceed ECB’s requirements, and we are very happy that we repaid SoFFin completely on the October 30. To summarize, the highlights of the third quarter, Aareal Bank is successfully on track. Let’s step further to the agenda. The agenda for today will have the following topics. First, we want to describe a little bit environment of the Q3 quarter. Second, we come to the results at a glance. Third, we want to step into detailed information on to segment performance of both segments. Fourth, we want to describe the balance sheet structure, capital funding position. Then we will follow with the Group figures, the asset quality and the last topic will be the outlook for the whole year 2014. Let’s start with environment we had in the third quarter. While you can see that the capital markets, especially in Europe, turned more cloudy, there are still existing geo-political risks, I like to mention Ukraine, I like to mention ISIS, I like to mention some other topics concerning from Ebola. And these geo-political risks are not fully reflected in the markets. We see the ongoing quantitative easing with very low short-term and negative interest rates that will be a challenge for societies and for the banking industry in total, but it could be a risk of asset bubbles and growing downside potential therefore is given. The slight world economic recovery continued in the third quarter, but what we can see, it slowed down. And what we can see different speed of recovery in comparison to Europe, North America and Asia. The regulatory environment is more predictable, but still, there are possible challenges like RWA-floor or TLAC. And the published asset quality review and stress test results brought more transparency to the European banking sector. What does it mean for Aareal Bank Group, and what are the most important main takeaways? First of all, what we can see in the segment will be structured finance, there is increasing competition. That means more profit margin, pressure, compression earlier-than-expected and early repayments of high margin loans will continue. Partially we have an offset by lower funding costs and structure. We see moderately increasing property values and stable to slightly increased rents in the majority of the European countries but further NPL inflow mainly from our Southern European portfolio is possible. While Aareon is expected to be on track, the deposit business will suffer on segment reporting level coming from this current low-interest rate environment, but as you know, the redeposit from the housing industry have a very strategic partner for our company, they are refinancing source besides German Pfandbriefe and senior unsecured. If we go further to the results at a glance, you can see that we achieved an operating profit of EUR 66 million that means that positive development continued. The most important positive intake is coming from the net interest income, which we could increase up to EUR 181 million. The reasons for this increase of the net interest income are the following. First of all, we had a portfolio growth of EUR 5.7 billion since the third quarter of 2013. This included Corealcredit, with an amount of EUR 3 billion. We have early repayments effects more than planned of EUR 13 million in the third quarter. We have lower funding costs. These together is the reason that we had a very positive net interest income development. The net loan loss provision was EUR 36 million. This is in line with the given guidance. The net commission income was EUR 37 million, a little bit lower, but as you know, the first quarter is the most important quarter under seasonal effects for this kind of business in the IT area. The admin expenses of EUR 109 million, is burdened by regulatory projects and one-off integration costs of Coreal. Coreal means total amount of EUR 4 million. That means together operating profit of EUR 66 million, and that’s a very positive development in the third quarter for the whole Group. If we step into the different segments, I’d like to start with the structured property financing segment. If you look on Slide #9, on the right side at the top, we achieved in the third quarter in total EUR 3.4 billion of new business. And you can see the split between newly acquired business and renewals. Newly acquired business is the dark blue column, that’s roughly about EUR 2.3 billion and renewals are EUR 1.1 billion. And that’s the reason if you see the first three quarters that we achieved EUR 7.6 billion new business, that our original guidance of EUR 8 billion up to EUR 9 billion will be increased up to EUR 10 billion. Some additional information for you. We still have the chance to keep gross margin around 250 basis points, and if you take the newly acquired business loan-to-value is about 62%. If you go further to the consulting/services segment, the situation at the quarters before is best described in the second headline, Solid in IT & Volumes. We achieved up on average EUR 8.7 billion default from the housing industry, that’s an excellent result, but the weak on the segment perspective in the deposit margins, coming from the historic low industry environment. If you see the split between the IT business coming from our Aareon Group and the deposit taking business, you can see that Aareon is on track with EUR 5 million operating profit in the third quarter and minus EUR 30 million under the segment perspective in the deposit taking business, means in total, minus of EUR 8 million, but please take into consideration what I said at the beginning, these deposit business is very important on the strategic point of view as the third funding resource besides German Pfandbriefe and senior unsecured. Let’s step further to some information concerning the balance sheet structure, capital funding position. You see, we have a Common Equity Tier-1 of 12.3%. SoFFin participation included, we have a Common Equity Tier-1 of 14.2%. You know that we repaid SoFFin totally. It was total amount of EUR 300 million. That means a Tier-1 ratio without SoFFin will be 14.2%. And if you take the total capital ratio without SoFFin, it will be around 20%. Additionally, you can see that our bail-in capital ratio is about 8%, it’s an excellent result. We have strong capital ratios. This will enable us to take new business on board. And what you can see that the leverage ratio at the end of September, excluding SoFFin, is 3.9%, including SoFFin 4.4%, concerning to additional Tier-1 which we want to raise, it depends on the market conditions. Maybe we can discuss this topic a little bit later. Let’s go further to a slide where you’re familiar from which we presented last time for the first time. In Slide #14, you see on this slide, the possible capital position according to the Capital Requirement Regulation. You can see that according to the Capital Requirement Regulation a minimum total capital ratio of 8% with a composition of 4.5% Common Equity Tier-1, 1.5% Additional Tier-1 and 2% of Tier-2. In addition to this big half combined Common Equity Tier-1 buffers, 2.5% capital conservation buffer and 1% other estimated buffers. That means in total, the total capital ratio of 11.5%. And now it’s very important that you get the right optimized capital structure Additional Tier-1 and Tier-2 to replace the Common Equity Tier-1 for the fulfillment of the required 11.5%. And we are on track. We will come a little bit late to the topic that the issued Tier-2 already of an amount of EUR 500 million and concerning Additional Tier-1, which we are targeting on depending on the market conditions. Going further to the expected development of our capital ratio, please focus on the middle of the Slide 15, you see fully phased at the end of September, 12% Common Equity Tier-1. The 12% is without SoFFin. And if you take into consideration our long-term targets, we could calculate with little bit more than 10.75% Common Equity Tier-1, including Additional Tier-1 of 1.5%, our Tier-1 ratio will be a little bit higher than 12.25%. And this slide gives you transparency for our long-term target concerning the capital ratios. Then we have results of simulation and the Slide #16 is new. And I want to say that this is replication of the ECB stress test with our current credit portfolio part without SoFFin, and there is no confirmation by ECB. It’s only a test which we had internally. It’s very important that you – this remark I just made. What you can see starting with 12% Common Equity Tier-1 without SoFFin, we have little reduction coming from the asset quality review and then we have coming from the stress reduction by 2.9%. This is lower risk-weighted assets increased mainly driven by the fact that the Coreal still applied the standard approach that means 25% Common Equity decreased lead to 2.9% stress reduction. But if you see the 9%, and if you compare, this gradually leads to threshold of 5.5%. We are far above this threshold [ph], it means we have excellent capital ratios, even after asset quality review and even after the stress test. Going further to the asset liability structure, you can see on Slide #17, that we have long-term funds of EUR 30.8 billion. And if you add up the customer deposits from the housing industry of EUR 8 billion, that means roughly about EUR 39 billion long-term refinancing sources for a loan book of EUR 29.6 million. It’s a conservative structure. On Slide #18, you see a comparison between the end of September to the end of 2013. It’s very important at the end of 2013, the figures in brackets don’t include the Corealcredit. You know that the closing of Coreal was on the 31, 2014. Concerning net stable funding and liquidity coverage ratio, considered Aareal Bank already fulfils the future requirements with excellent results. Refinancing situation, we had excellent results after the first nine months. In total, we issued EUR 3 billion. You see the splits; Pfandbriefe EUR 1.6 billion, senior unsecured EUR 900 million and subordinated debt with EUR 500 million. These are excellent results on the funding side. And again all the method on the funding side, they say that our business model is highly sustainable. The refinancing situation with the diversified funding sources you can see on Slide #21. You will see that the stake of the wholesale funding Pfandbriefe and senior unsecured is relatively over stable. The most important approach is our so-called private placements, that means we have projects roughly about 650 addresses [ph] on the funding side, where we are in the regulatory – in the regular level context. Let’s take further to the Group figures of the third quarter, and I’d like to start with the net interest income. You see the strong development in increase up to EUR 181 million. As I mentioned at the beginning, one important reason for this increase is a portfolio growth of EUR 5.7 billion since third quarter 2013, and here included Corealcredit with EUR 3 billion. Additionally, we have, in the third quarter EUR 30 million from early repayments, more than planned. And we have a continued decrease of the funding costs. These are the three most important drivers of the increase of the net interest income up to EUR 181 million. The loan loss provision of EUR 36 million is in line with our guidance. The net commission income with EUR 37 million is in line with our expectations. Concerning admin expenses, we confirm the guidance of EUR 110 million for the whole year. We achieved EUR 109 million in the third quarter. Here we have two topics coming from extra burdens concerning integration of Coreal of EUR 4 million and regulatory projects. Let’s go further to the asset quality. And on Slide #28, you can see that we are still highly diversified by region and by property type. The total loan-to-value for the whole loan book of EUR 29.6 billion is 64%. It means it’s the same level like the quarters before. Concerning to NPL development, you can see a slight increase up to EUR 963 million. We have excellent coverage ratio specific allowances 34.7%, and take into consideration portfolio allowance, we have 47%. On Slide #30 at the bottom you can see the NPL ratios and you see an NPL ratio at the end of September 2014 of 3.3%. Again this demonstrates our high quality of the loan book. Let’s start into the different regions and I’ll give you the information in detail. I’d like to start with Western Europe, excluding Germany. In U.K., we have a total volume of EUR 3.8 billion. That’s an increase by EUR 600 million in comparison to the second quarter. Average loan-to-value 60%, stable, and no NPLs. In France, we have EUR 3.1 billion, that’s an increase by EUR 200 million. Average loan-to-value of 58%. That’s an increase by 3 percentage points. NPLs have slight reduction EUR 94 million, reduction by EUR 4 million. Belgium EUR 600 million. It’s increased by EUR 100 million. Average loan-to-value of 64% and no NPLs. Netherlands EUR 1.2 billion. It’s a reduction of EUR 100 million. Average loan-to-value 65% with a slightly decrease by 1 percentage points. Switzerland, only a small portfolio of EUR 300 million. Average loan-to-value of 50%. If we go further to the German credit portfolio. It’s including Coreal. It’s in total volume of EUR 6.6 billion. It’s a reduction by EUR 300 million. Average loan-to-value of 64%. And total NPLs, EUR 126 million. That’s a reduction by EUR 30 million. The actual portfolio of Coreal is EUR 3 billion, with the reduction in comparison to the second quarter by EUR 200 million. Let’s go further to Southern Europe. We start with Italy. Total volume of EUR 3.1 billion, stable. Average loan-to-value is 72%. It’s a slight increase by 2 percentage points, and NPLs EUR 500 million. It’s an increase by EUR 54 million. In Spain, total volume of EUR 1.1 billion. It’s increased by EUR 100 million. Average loan-to-value of 88%. And NPLs could be reduced to ERU 79 million, reduction of EUR 13 million. Eastern Europe credit portfolio. In Poland, volume of EUR 1 billion. It’s a reduction by EUR 100 million. Average loan-to-value of 59%. No NPLs. Russia, EUR 600 million. Average loan-to-value of 53%. No NPLs. The situation in Russia is unchanged. We don’t do any new business right now. Turkey, EUR 700 million. Volume is stable. Average loan-to-value, very low, 51%. NPLs, EUR 34 million. Going further to Northern Europe. I’d like to start with Denmark. Total volume EUR 500 million, stable. Average loan-to-value of 118%. That’s an increase by 2 percentage points. NPL, slight decrease by EUR 6 million, down to EUR 79 million. Finland, EUR 500 million. Stable, with average loan-to-value reduction by 4 percentage points to 82%. NPLs, EUR 17 million. In Sweden, total volume EUR 1.3 billion, plus EUR 100 million. Average loan-to-value of 62%. And NPLs, EUR 30 million at EUR 28 million new. In Northern America. United States, the total volume is EUR 4 billion. It’s an increase by EUR 400 million. Average loan-to-value 62%. There is a slight decrease by 1 percentage points. Canada, EUR 400 million and increase by EUR 100 million. Average loan-to-value, 66%. And then we come to Asia credit portfolio. In China, EUR 300 million, plus EUR 100 million. Average loan-to-value of 48%. No NPLs. Japan, volume of EUR 100 million, stable. Average loan-to-value 60%. No NPLs. This was the information to our credit side, so our loan side. Now we go further to the treasury portfolio. We have EUR 11.5 billion of high quality and high liquid assets, mainly invested in public sector. And now we come to the very important outlook for 2014. I like to start with the operating profit. And it’s the strong business strength materialize further, for us, it’s achievable a range of EUR 420 million up to EUR 430 million. That means if we focus on the fourth quarter, that the operating profit in the fourth quarter is achievable in the range between EUR 72 million up to EUR 82 million. In detail, it means that we calculate a net interest income increase to EUR 650 million up to EUR 680 million. Net loan loss provision, a range of up to EUR 150 million is unchanged. We calculate that we finish at the end of the year at the upper range of this range. Net commission income slightly lower expectation, EUR 160 million up to EUR 170 million. Admin expenses unchanged, EUR 430 million up to EUR 450 million, including one-off related to the acquisition of Corealcredit Bank. Negative goodwill value of EUR I million to 152 million, means operating profit, if the strong business trend materializes further, EUR 420 million up to EUR 430 million. Pre-tax ROE now 10%, excluding negative goodwill from 9%. New business origination coming from the deal pipeline and the excellent results we achieved within the first nine months, we raised our target from EUR 8 billion up to EUR 9 billion up to EUR 10 billion. Operating profit of Aareon is EUR 26 million. Excuse me, I have pre-tax increase from 9% to 10%. It’s the correction, sorry. Mid-term outlook, unchanged on Slide #42. You see the Slide 42, which is very familiar to you that we stick to our pre-tax mid-term target of 12% for mid-term ROE pre-tax target of 12%. You see the most important driver to achieve this ROE target is the underlying capital. That means we have more capital than needed for our business. At the end of the day, as a strategic discussion we want to do the capital, you can invested in more new business that could be a topic, but on the other hand, we have to reflect that our most important approach is so-called private placement business, and by origin we are – by nature, we are have a kind of limitation. We can look for portfolios, and portfolios have kind of disadvantage because you have to fund in, in the same time, and hope the total amount of let’s say EUR 2 billion, EUR 3 billion or EUR 4 billion. And what you have to say to your own sales force, stop doing business because we just bought a portfolio. That’s not very motivating for the people, or we can look for other targets in the markets, like Coreal 2 deal is coming around is not predictable, but we have our eyes open. Concerning the total – concerning net interest income, loan loss provision, Aareon and admin expenses, we still stick to our action plan which is familiar on Slide #43, 44 and 45. And additional when I forgot is we have no chance to invest in extraordinary capital in new business in portfolio or Coreal 2 deal then we have to talk about extraordinary dividend payment. And it’s quite clear that this year we still have for 10 months the softening in our books, that means even if we pay dividends that’s soften into the year in 2014, we’ll participate by the dividend payments, then it’s quite clear that we will, or if we would pay extraordinary dividend, this can’t happen in 2015 for ‘14 because the softening in our books will be more predictable in ‘16 for ‘15 or ‘17 for ‘16. If we go further to the outlook of 2014 and the mid-term outlook, you can see on Slide #46 that our Tier-1 ratio is fully phased, 14% up to 15%. Our long-term target as I mentioned before is higher than 12.25%. The cost income ratio only focusing on the segment structured financing is 40% in 2014 and mid-term is 40% again. The EBIT margin in the IT business is 14% this year, and we calculate in the mid-term of 17.5%. Pre-tax ROE, as I mentioned before, 10% this year and around 12% on the mid-term perspective. Cost of equity calculated this year of 9% up to 10% is around – if currently low-interest environments keep going on, then we will have a discussion in the markets to reduce the cost of equity in the future. This is short presentation from my side. Thank you very much for your attention. And now we’re pleased that we would like to answer your questions.

[Operator:]

(Operator Instructions) One moment please for the first question. The first question comes from Mr. Benjamin Goy from Deutsche Bank. Please go ahead sir.

[Benjamin Goy – Deutsche Bank:]

Yes, good morning everyone. Couple of questions from my side. Since you mentioned Additional Tier-1, if there are chances you’ve already issue it still in 2014, or you might wait for ‘15? Second question would be on the excess capital. Acquisition of loan portfolio doesn’t seem to be your preferred option. So is currently your preferred option to distribute a special dividend? And then the third question would be to costs. Given the integration costs for Corealcredit for the underling run rate in Q3 was EUR 105 million. Is that fair to assume going forward, particularly in ‘15? And the last one is, Corealcredit, you lowered the RWAs Q-on-Q by roughly EUR 300 million. Now already though your initial guidance for the end of the year or so, could you give us an update here on the Corealcredit RWAs in ‘14 and ‘15? Thank you.

[Hermann Merkens:]

So if may start with the first question on A Tier-1 and timing. A Tier-1 and timing, it is always depending on markets, as you know, and we’re already – I’m confident that if the markets are there, then we will be ready to exercise and execute. We see slightly increasing liquidity in the A Tier-1 markets. So we are – with the Q3’s figures with regards to monitor the markets in the short-term, and therefore we are bit optimistic that we will and you will see A Tier-1 during the last quarter in 2014. Excess capital options. As you perfectly said, we have and was mentioned, we have three options. The one is portfolio, the other one is buying additional second target, if you like kind of Coreal 2 deal and that are the two options where we could employ the excess capital. The other option is to distribute special dividend, and we could only invest into a target if that would be aligned with the 12% ROE production. So if there is a target around which really think about it, but as you know, always the targets might be there but the deal is not done until the deal is signed. With respect to the admin expenses run rate. Yes, you could assume EUR 105 million run rate, which should be on the upper end. I can’t get what’s your [indiscernible].

[Wolf Schumacher:]

I think the last question was the reduction of the portfolio of Coreal.

[Hermann Merkens:]

Yes. So it’s still to be continued. It’s already fund. You will see a continued decrease of the Coreal portfolio, and therefore the RWA density of the entire portfolio should shrink over time a little bit, because the Coreal has been redundant [ph] approach. And as you know we are in the advanced. Are your questions answered?

[Benjamin Goy – Deutsche Bank:]

Yes, many thanks.

[Wolf Schumacher:]

Next question please.

[Operator:]

The next question comes from Britta Schmidt from Autonomous Research. Please go ahead.

[Britta Schmidt – Autonomous Research:]

Hello, and good morning. I have a few questions. One is, you’ve added as your possible challenges additional capital requirements from RWA-floors and TLAC. Could you perhaps tell a little bit more into detail as to whether is it something that is being this past TLAC, where do you see yourself this is about issue requirements. Just a little bit more detail on the bit of quantitative comments surrounding that. The other question is on the development in 2015. We’re obviously seeing a higher contribution of prepayments fees, which means the book [indiscernible] probably call it, quite good, but you’re also talking about margin pressure. Does it mean that the net interest margin is potentially going to fall a little bit more, you’re going to have a higher contribution from the payment fees with the next year but as we remain they need to be compensated with more volume growth, and perhaps originally anticipate this year you’re already doing better? And then lastly, just a general question, as to whether, the raised outlook for 2014. Why that doesn’t really change your longer term outlook?

[Hermann Merkens:]

So a couple of questions. If I may start with TLAC. TLAC, if you look in to our numbers, we are still, if you like, there. So no worries in that respect. And as far as we know, TLAC is just a measurement for the real global acting banks. But nevertheless, we are confident that we could fulfill even TLAC requirements. That’s one comment from my side on TLAC. I’m not quite sure, but it’s meaningful to do it versus two better approach, if you like, one on the nominal basis and the other one on the RWA basis. I’m not quite sure whether RWA basis calculation is the right way to measure that, because we have tons of RWA models, and I think especially on that, nominal approach would be better one but I’m not in the position to decide on that. With respect to the net interest income, 2015. That’s on the one hand thing where we have to go back in 2014. Yes, the early prepayment fees are way higher than the originally planned and that drives the outlook for 2014. If this trend continues through the fourth quarter, that I believe then we will achieve higher operating income. And yet, we’ve seen volume growth if you extract Coreal portfolio a little bit above our targets, two main drivers here. The one is the new business. The other one are some one-off effects there. And while we have increased our 2014 outlook, main reason yet is the business trend with the early prepayment fees that we’ve seen in 2014 and early prepayment fees are always a bit difficult to take rate, because it’s really depending on early prepayments. Therefore, first of all, we increased our outlook for the fourth quarter and for the full-year. And if we are on the way in 2015 and we have an idea what is the trend on the early prepayments, then we will see whether we calculated them “correctly” in 2015 or whether we have variance in our outlook here as well. Overall net interest income trends. There are additional drivers for the good net interest income resides. One driver is that we have cheaper funding costs that originally planned, and in addition to that, we’ve been very successful with our deposit taking business where we global composition of the balance sheet should expect from long-term funding into deposit to a certain extent. So we have, on the one hand, higher competition in the commercial real estate business, which is expected or to be expected lower margins on that. Please keep in mind, so long, we are doing on 250 basis point basis with little bit better than we originally thought in the second quarter, but we have to face, that’s our view on the future. We have to face lower margins on the commercial real estate business ongoing. So there are some positives and some negatives. All in all, we think that net interest income was market dictated, but the negatives will override the positives in the mid-term, but that could be offset by working on the capital composition, as Wolf and I mentioned. So there are various options here to employ excess capital or distribute excess capital to shareholders.

[Britta Schmidt – Autonomous Research:]

And can I just…

[Wolf Schumacher:]

Britta, did he cover all your questions?

[Britta Schmidt – Autonomous Research:]

Yes. There is one question remaining. Do you have any sort of guestimate where your risk-weighting and structured property finance [indiscernible] could you get there to?

[Hermann Merkens:]

In our models, I think we are stable. So it’s very hard to predict whether outflows are coming and what is really kept [Technical Difficulty] maybe ideas around these RWA-floors. Therefore it’s very, very hard to predict what kind of the idea is really coming through. And in addition to that, all this debate about capital conservation buffers, therefore I think it’s – at least it’s a mid-term and combination of all those topics. And if we have to sum it up, I think we are very capitalized to capture with those upcoming challenges.

[Wolf Schumacher:]

We have gentlemen in the line. Excuse me.

[Operator:]

It’s the background noise from the question line. Would you like to take the next question?

[Wolf Schumacher:]

Yes, please.

[Hermann Merkens:]

Britta, all your question are answered?

[Operator:]

She is not answering at the moment. (Operator Instructions)

[Wolf Schumacher:]

Next question.

[Operator:]

The next question comes from Mr. Philipp Haessler from Equinet Bank. Please go ahead.

[Philipp Haessler – Equinet Bank:]

Yes, hello. This is Philipp Haessler from Equinet. I have one question regarding the dividend, but not possible special dividend, but the dividend for the current year. Consensus is currently expecting EUR 1.20. So I would be curious whether you could – whether you think this is realistic. And then maybe looking into the future, so maybe you could give details what payout ratio you will be targeting if leaving aside the topic of the special dividend? Thank you.

[Wolf Schumacher:]

We stick to our same, what we’ve said all during our conference call after the results of the quarter, we stick to the same that we say 50% is the payout ratio of the dividend. And everything else, we have to weight, concerning our figures till it will be finalized and if you pay about 50% payout ratio, it’s excluding the [indiscernible]. That’s quite clear. It’s very important to say that.

[Hermann Merkens:]

So on line item, you should refer to consolidated profit and under the IFRS counting, meaning in this distributor items to shareholders of soften [ph] coupon included, if you exclude the soften [ph] coupon and what is left that’s the money or the pool that we are talking about. And if we paid 50% from that pool, then you are in the range, if you like, to calculate 50% payout ratio. Nothing decided yet. I have to mention that unfortunately, normally those decisions will be made in February, but that’s our dividend policy that we introduced in 2014 for the normal course of business.

[Wolf Schumacher:]

Question answered?

[Philipp Haessler – Equinet Bank:]

Yes, thank you.

[Wolf Schumacher:]

Next question please.

[Operator:]

There are no further questions. (Operator Instructions) We have a follow-up question from Mr. Dirk Becker from Kepler Cheuvreux. Please go ahead.

[Dirk Becker – Kepler Cheuvreux:]

Yes, good morning. I have a couple of smaller question please. First of all, I would like you to maybe expand a little on the question of the RWA density. You currently have, I think, 32% density for your commercial loan book, and if there is a floor, it would use a 20%, which I think is one of discussion point. How much would this add to your risk-weighted assets, is this couple of billions or how should we look at this? Then secondly for the deposits business. What’s the average cost that you paid for those deposits at the moment, and how much of this EUR 8.7 billion is available for you for long-term financing purposes? And then finally, you talk a lot about margin pressure for the business as a whole, and yet we don’t seem to see this in your own business. So I was just wondering whether you have any explanation for this, and why you believe there is margin pressure in the industry and you don’t see it?

[Hermann Merkens:]

I’ll start with maybe with the last question concerning the 250 basis point gross margin, and saying that if margin pressure in the markets. What we can see right now that they big advantage that we are highly diversified by different regions in comparison to some other banks who are highly focused only on the German market or two or three markets. Then we established that very fast process on the decision making up to the drawing of the loan to our customers. And I think that the fastest process in the competitive environment open to your customers and that is very important to our customers because they can completely relied on us in a very, very short period of time. Third, we stick to our customers even during the times of the crisis. And what we do, we enlarge the landscape doing business, for instance in U.K. or the United States but only focusing on the most important metropolitan cities but even looking for attractive business regions where you can do business. And fourth, we have a high qualification concerning structuring from deals – concerning deals. We have a specific know-how that we can answer all the questions to our customers. It was the reason that we made an excellent 250 basis points.

[Dirk Becker – Kepler Cheuvreux:]

Okay. So the margin pressure is in the few segments of the markets where you managed to avoid those segments?

[Wolf Schumacher:]

No. The margin pressure is in general in the market. And as we said, in the mid-term perspective, we calculate the gross margin of 200 basis points. If you see, there are much more competitor in the markets, not only banks, even insurance companies are doing commercial real estate business. And this kind of business they are focusing on the so-called co-op business is overseable, and that means this high liquidity in the market and the high number of competitors brings some margin pressure and higher loan-to-value on the landscape.

[Hermann Merkens:]

And Dirk, if I may add a comment. We have, as you know, a deal pipeline tool where we have deal pipeline or deals versus average probability. And if we look into this, we see that the expected gross margin on the deals [ph] is shrinking. So, so far because of the very good into the deal pipeline, we’ve been able to pick up the right deals, but we see a clear development over the last couple of months into the direction of maybe a little bit lower gross margins. Therefore, our prediction for the future is that we will have to face lower margins on new business. With respect to your question about cost of deposit business. In previous months, we talked about 50 to 55 basis points. I think we are now down to 30 to 35 basis points, following with respect to the low interest rate environment. We do not disclose calculation of net funding ratio funding market-wise, but you could see that we have, on one hand, an increase in our deposit business or average volume increase in our deposits business and could keep our net funding ratio very, very stable at 1.1 besides the fact that we are onboarded Coreal and increase of our own loan portfolio that may give you an idea that the deposits are [indiscernible] ratio of ours if you like highly rent. There are lots of floor debates around, so and as I had previously, we would like to participate on debates based on some ideas, but you could imagine that we have some buffers in our business model. The first buffer is that our Common Equity Tier-1 was 12%. It’s a very good one. Please keep in mind that we are with our portfolio a little bit above our target. Originally, we targeted at EUR 25.5 billion portfolio. We’re now at EUR 26.5 billion, excluding Coreal. We have options with respect to Coreal, implicit options, because we intent to run down the Coreal portfolio then transfer that by doing so into an advanced approach as the Coreal portfolio run approach but free up additional equity here. All in all, there is a 20% floor we would be comfortable to cope with the floor demand and to have excess capital in hand to either invest or distribute.

[Dirk Becker – Kepler Cheuvreux:]

Okay. Thank you very much.

[Wolf Schumacher:]

Next question please.

[Operator:]

The next question comes from Mr. Martin Peter from LBBW. Please go ahead sir.

[Martin Peter – LBBW:]

Hi, good morning. Martin Peter speaking. Aareon [indiscernible] question. I think it’s not your first priority obviously, but anyway, could you please give us a flavor of what might improve at Aareon, if you see the EBIT contribution EUR 5 million to EUR 6 million during the first quarters in 2013, also in the current year? So if no improvement, do you have any prospects for next two years in terms of top line and also how to reach a higher EBIT margin, any special measurements or whatever? Thanks.

[Wolf Schumacher:]

First of all, the Aareon business is EUR 27 million, EUR 28 million, EUR 26 million. That is one of the best achievements of Aareon. If you look back this number, it’s on very, very high scale if you go back towards the last couple of years. So we are happy. Unfortunately very, very high starting point to improve the business further and just taking edge to do so. One aspect is that we invest in international business and we will see a further pickup from that business in the future. Secondly, we have a transforming path from older IT system so-called GES [ph] System into a new alignment board of Sigma System. We expect that this transformation path will continue and will peak in 2017, ‘18, ‘19. Therefore there is business improvement of the Aareon EBIT caused by increasing consulting revenues in those years. So we have good indications that Aareon is well on track. And not to forget that we are investing somewhat in, if you like, kind of digital world environment, so we are improving especially IT add-ons in the Aareon business, where we will benefit especially in the mid-term term from. So we are confident that we will achieve those business targets mid-term, although we have to invest promptly in the short-term.

[Martin Peter – LBBW:]

Two follow-up please. Actually I think the upper revenue side does include consolidation effects or like-for-like, I think it’s not stable business you mentioned. And the second one is, do you have any figure for the sales of international business on the top line for 2014?

[Wolf Schumacher:]

I didn’t get your first one, but to your second one, it’s roughly one-third in EBIT and one-third in turnover. So rough numbers, you need to calculate. And I didn’t get your first one because around EUR 27 million, it’s one of the best years for Aareon.

[Martin Peter – LBBW:]

If I could, this includes obviously some consolidation effects [indiscernible].

[Wolf Schumacher:]

No, there is no consolidation effect. It’s separate.

[Martin Peter – LBBW:]

Okay. Thanks.

[Wolf Schumacher:]

Next question please.

[Operator:]

Thank you. There are no further questions.

[Wolf Schumacher:]

Okay. Then we’d like to thank you for your attention. Three final remarks; we had an excellent third quarter results. Second, we increased our full-year guidance. And third, the ECB review has confirmed our capital financial strength. Thank you very much.

[Operator:]

Ladies and gentlemen, thank you for your attendance. This call is being concluded. You may now disconnect.