Reassuring 1Q results and positive trends at Deutsche Pfandbriefbank (PBBGR), in line with prior guidance, with solid earnings driven by higher margins on new lending, a growing deposit base, a slowdown in the build-up of NPLs and risk provisioning, which were solid and in line with previous liquidity guidance (LCR, NSFR) and capital ratios (CET1), could build further momentum in the Pfandbrief segment with high exposure to CRE loans. The lender noted that the market conditions it is operating in are still challenging, particularly in the US.
The longer US rates remain high, the more likely it is that we may also see increased stress in transactions that have been extended in the hope that borrowers will refinance at lower yields sometime soon. The key areas to focus on in 2024 will be the US office buildings segment & Germany’s development loans (EUR3bn).
Negative headline risks and further downgrade risks remain intact given the negative outlook attributed by S&P to Deutsche Pfandbriefbank. This said, the solid set of first quarter results delivered and signs of a stabilisation in the US would support PBBGR’s covered bonds, as the overall covered bond buyer base is shifting from bank treasuries to more real money asset management. In this regard and during their 1Q24 earnings presentation, PBBGR indicated that its funding needs for 2024 are largely covered and that no further senior unsecured issues are planned for the remainder of 2024. PBBGR returned to the capital markets in May 2024, with a reverse-enquiry led 3Y FRN note (quarterly Euribor+50bp) EUR250mn Pfandbriefe, following the solid 1Q24 results reported.
Performance Metrics:
- Retail deposits grew 8% QoQ to EUR7.1bn in 1Q24. Guidance: EUR8.1bn Apr-24, of which 90% is term deposits.
- PBBGR’s covered bonds were backed by commercial real estate (CRE) loans (82%), including office buildings (47%), residential (18%) and retail (10%).
- NII was down 7% as a result of the non-core run-off and higher funding costs. These trends will likely continue into 2Q, particularly given the ramp-up in expensive deposits and planned asset disposals.
- Guidance is for flat NII in 2024, largely reflecting the low starting point for margins in 1Q23.
- In the Real Estate Financing portfolio, NPLs increased slightly from EUR1.5bn at YE23 to EUR1.6bn in 1Q24. This was mainly driven by the US office NPLs. However, the dynamics are positive on a QoQ basis, with risk provisioning, while remaining at a relatively high level of EUR47mn (1Q 2023: EUR2mn), coming down significantly vs. previous quarters (4Q23: EUR108mn, 3Q23: EUR83mn).
- PBBGR’s capitalisation is solid, with a CET1 ratio of 15.2% in 1Q24 (16.7% in 2022 and 15.7% at YE2023) with a MDA buffer of 550bp (EUR1bn) and fully-loaded Basel IV CET1 of 16.3% as of 1Q24.
- Robust LCR at over 200%, more than twice the minimum regulatory requirement and a NSFR ratio of 109%.