Deutsche Pfandbriefbank (PBB) plans to markedly increase its annual European property lending this year above the €4.9bn in 2012, as the “good bank” born out of Hypo Real Estate (HRE) seeks to amass a profitable loan book ahead of next year’s targeted re-privatisation.
PBB extended €4.9bn in real estate loans last year – including €2.5bn in the fourth quarter alone which was broadly equal to the combined three preceding quarters – with the 2013 annual lending tally expected to be closer to 2011’s €6.3bn.
Last year’s European property lending comprised 79 deals – including €2.9bn in new commitments and €2.0bn in refinancings – with an average maturity of four-and-a-half years at an average LTV of 56% and an average gross margin of 225 basis points over three-month EURIBOR – up an average 20 bps from 2011’s 205 bps average margin in 88 deals.
UK property lending represented €900m of the €4.9bn, reflecting 18% of PBB’s total European lending last year, taking the aggregate UK and aggregate European property loan book to €3.4bn and €23.7bn, respectively.
Pre-tax profits for 2012 were €124m, down from a €188m profit in 2011, marking the second consecutive annual profits since PBB was spun out of Hypo Real Estate in June 2009, and the good bank’s maiden year loss of €135m.
HRE reported losses of €5.5bn for the financial year 2008, followed by a €2.2bn loss in 2009 and losses of €0.9bn in 2010, during which year FMS Wertmanagement, the bad bank, was formed.
PBB is 100% owned by HRE Holding which, in turn, is 100% owned by the SoFFin, the Financial Market Stabilisation Fund set up by the German federal government following the collapse of Lehman Brothers in September 2008 to stabilise the German banking industry.
Gearing up for re-privatisation
PBB is seeking to take advantage of current real estate lending market dynamics to increase its profitability ahead of re-privatisation which it is aiming to achieve by the end of next year.
Under the terms of Hypo Real Estate’s €102.0bn bailout in October 2008, the restructured Deutsche Pfandbriefbank “good bank” is required to “take place without delay, but by 31 December 2014 at the latest, under economically sustainable conditions, namely by sale to one or more purchasers which are independent of Germany and the HRE, if necessary by means of flotation”.
Economically sustainable conditions for re-privatisation are defined as a sale which recoups between 80% and 100% of the aggregate €10.23bn funds which SoFFin has injected as part of the bailout by the end of this year or next.
“If re-privatisation has not taken place by 31 December 2014, it will be effected by 31 December 2015 irrespective of the proceeds achievable,” according to the EU Commission’s decision on HRE’s State Aid dated 18 July 2011.
Under which scenario, a “divestiture trustee” will be appointed with the remit of completing re-privatisation irrespective of the proceeds achievable in which case a symbolic fee alone could be paid.
Finding a buyer is expected to be difficult, as is evidenced by Apollo Global Investors aborted attempt to acquire acquisition of West Immo, with WestLB, the bank’s parent, citing “severe market deterioration” and “an unacceptable final sale price offer” just under 12 months ago.
Selling the performing loan book is laced with complexities, particularly given the scale at which loan margins have moved in the years since the global financial crisis with retreating property lending banks, combined with rising bank funding costs.
As a result, the weighted average gross margin on PBB’s €23.7bn loan book – for which only €1.1bn, or 4.6% are classified as problem loans – will be considerably below 2012’s 225 bps average margin, which would require a discount on the sold book by a buyer.
In addition, considerable senior unsecured funding is required under Basel III regulations for banks, which “will negate potential interest from private equity investors, who could have a strong interest in PBB’s CRE assets,” wrote Fitch Ratings in December 2011.
“An initial public offering also seems unrealistic, considering alternative public investment opportunities with a longer track record than PBB’s after the asset transfer in October 2010 and its revised strategy.”
Fitch believes the existence of a mandatory sale date “rather contradicts the idea of an economical, efficient sales process.
“Logically, potential bidders will wait as long as possible to bid, if at all, to reduce the purchase price. In Fitch’s view it is unclear what the EC would demand from PBB if the sale process were to fail.”
PBB has considerable room to expand its real estate loan book, under the restrictions outlined by the EU, both in terms of annual new lending and total loan book.
PBB’s aggregate real estate loan book must remain between €20bn and €40bn by the end of this year, but must increase by a minimum of €10bn to between €30bn and €50bn by the end of next year, with the parameters remaining the same for the final end of year 2015 period.
Annual new real estate lending, including refinancings, was restricted to between €9bn to €15bn last year, which increases in spread to €7bn to €16bn this year, then €5bn to €16bn in 2014 and 2015. To put this into context, Hypo Real Estate’s new real estate lending in 2007, the year before the full onset of the global financial crisis, was €32.1bn.
Manuela Better, CEO of Deutsche Pfandbriefbank, said: “Deutsche Pfandbriefbank can look back on a successful year in 2012. We generated very high funding volumes, and proved our origination strength especially during the second half of the year.”
Aggregate new long-term funding volume amounted to €6.5bn, of which pfandbrief issues – with an average maturity of seven and a half years –accounted for €4.2bn, with another €2.3bn placed in promissory notes and bearer bonds, with an average maturity of four-and-a-half years.
PBB has launched an online retail savings deposit business – pbbdirekt.com – to offer overnight and term deposit accounts for retail customers to broaden its funding base.