The sale process of Deutsche Pfandbriefbank (PBB) has officially started after Hypo Real Estate Holding (HRE), the German government-owned parent company, announced the initiation of a two-track re-privatisation strategy today.
HRE has appointed Citigroup and Deutsche Bank as financial advisors to manage the twin-track sales process of either a sale of 100 per cent of its stake or to exit the government’s ownership through initial public offering (IPO).
In an announcement this lunchtime, Andreas Arndt, PBB’s co-CEO and chief financial officer, said: “We are embarking upon re-privatisation, against the background of a very positive performance over recent years, solid results for 2014, and an outstanding position on the credit and capital markets.”
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.
PBB’s is comprised of two active business lines – pan-European real estate finance (REF) and public investment finance (PIF) – which are dubbed the bank’s strategic portfolios.
The more significant of the two components is PBB’s CRE loan book, which climbed €1.7bn, on a net basis, to €23.9bn over the nine months to the end of Q3 2014.
PBB’s five major lending markets in Europe account for almost 95% of its total REF loan book: €12.3bn in Germany; €4.0bn in the UK; €2.5bn in France; €2.3bn in CEE; and €1.5bn in Nordic countries (see below).
While PBB’s Q4 and annual results are not published until 9 March, the bank stated in today’s announcement that new business across REF and PIF increased 24% year-on-year to €10.2bn in 2014.
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 and the good bank emerged as Deutsche Pfandbriefbank.
The following year in 2011, PBB returned to annual pre-tax profitability with €188m, followed by annual pre-tax profit of €124m in 2012, then €165m for 2013.
In the announcement today, the bank re-stated today that it expects consolidated pre-tax profit of more than €170m for 2014, when PBB’s annual results are published in three weeks.
Co-CEO Thomas Köntgen added: “Once again, strong new business is evidence of an excellent position in our European core markets. We have generated attractive margins in a highly competitive environment, maintaining or even boosting our market share whilst consistently adhering to our conservative approach to risk.”
However, post-tax return on equity (RoE), a key metric of profitability for banks, remains low at 4.9% for the calendar year 2013 and 2.1% in 2012.
By comparison, Aareal Bank’s post-tax RoE was 5.2% in 2.13, consistent with subdued levels throughout PBB’s peer group. These low RoE levels are partly driven by banks’ cost of complying with increased regulation –which is designed to safeguard taxpayers from ever again having to rescue banks from collapse in future recessions.
Speaking in an analyst call in August 2013, PBB’s former chief financial officer, Alexander von Uslar, who has since moved to LBBW to become its CFO, said at the time: “The return on equity is not what we want or where we need to be.
“We need to grow the portfolio, and reducing costs over time… it [RoE] has to be around 8% for re-privatisation.”
PBB is one of the leading European finance providers for commercial real estate and public-sector loans and is the largest issuer of Pfandbriefe and ranks amongst the top five covered bond issuers in Europe.
Net interest income, which is PBB’s single most important source of income, “rose markedly stronger in 2014 than other income components”, the bank stated in the announcement, adding that loan loss provisions remained at a low level.