Pbb Deutsche Pfandbriefbank pulls back on low-margin European business
The steady decline of pbb Deutsche Pfandbriefbank's share price since its flotation a year ago is symptomatic of the problems being faced by the successor bank to Hypo Real Estate. Last week's second quarter figures show the corrosive effect of record low interest rates on the Munich-based property financing bank, and the biggest issuer of Pfandbriefe on the German market.
The bank lent €700m less for European commercial real estate in the first half of the year, compared to last year. It wrote €4.7bn in new CRE lending (down from last year's €6m), with new commitments increasing slightly while extensions declined. The bank attributed the decrease in lending to its unwillingness to compete with its peers in shaving margins to the bone and writing unprofitable business. Pre-tax profit for the half-year fell to €87m from €112m last year, down nearly 20%.
Germany made up 51% of new business, followed by the UK (18%), CEE (9%), France (8%) and the Nordic countries (3%).
The bank has now adjusted its full-year forecast for new lending sharply downwards from its original target of €12m, owing to “a continued increase in competitive pressure, very demanding credit markets, and financing requests which increasingly no longer fulfil PBB’s expectations in terms of risk vs. returns”.
The bank addresses the Brexit vote in its half-time report. “At the very least, the impending phase of uncertainty may lead to significant delays of investment and financing decisions. Persistently low interest rates extending to longer maturities, ongoing political uncertainty, and a potential recession might lead to sustained distortions to the funding markets, and, by extension, PBB’s own activities in those markets. This might result in a targeted reduction of new business volumes.”
On a call with analysts last week, pbb's CEO Andreas Arndt said his bank's ability to still maintain comparatively high levels of new business given the market headwinds was an achievement in itself. He said the reduction in new lending over the period, relative to its performance for the same period last year, was due to “very competitive offers from other banks which we decided not to match”. PBB’s new CRE lending was written with an average gross margin of 170 basis points, he said. The bank opted to “stick with our conservative risk approach... and put quality before quantity” in the pricing of new business.
Like its peer Aareal Bank, pbb Deutsche Pfandbriefbank plans to cut back on new business to protect its margins and to make a renewed approach to the US market. “The rationale for that is that the US is and remains the largest real estate market in the world. We have a lot of international clients who do business in the US. The market also provides attractive margins and it is Pfandbrief-eligible. It will be primarily syndication based and East Coast focused”, said Arndt.
The bank will leverage existing networks of partner banks and international clients to ease its return to the market, focusing on New York City, Washington, D.C., and Boston, said Arndt. The total annual size of the US commercial financing market is estimated at more than €300bn, compared to Europe’s circa €200bn with gross margins (on comparable LTVs) between 170 to 280 bps in the US, compared to up to 190bps in Europe, he added.