PBB’s Q1 CRE lending soars to €2.7bn although CEO admits to margin pressures

Deutsche Pfandbriefbank (PBB) confirmed commercial real estate finance new business of €2.7bn in the first quarter, more than double the €1.6bn achieved in the same quarter last year and a new first quarter record, although the bank admitted to increased margin pressure on new business.

PBB logoPBB’s average gross margin has fallen by around 30 basis points across 2014 to 170 bps up to the end of the first quarter.

Andreas Arndt, PBB’s co-CEO and CFO, said in a presentation to analysts this morning that “we have to acknowledge that we see reduction in margin on the asset side for new business”.

He added that the 170 bps margin level “remains within the vicinity of our expectations and plans”.

Arndt continued: “There is a unanimous feeling that there is a necessity to put a stop to margin erosion and there is a feeling that this is coming close now, but we will have to see how this really develops.”

In an answer to analysts’ questions after his presentation, Arndt added: “We do observe that the margin pressure on the asset side is for new business is somewhat stronger than the funding relief which we experience on the liability side.

“We have to acknowledge that on new business margins that we do not only see the reduction in gross margins on the asset side but margin compression on total net margins on the business.

“We have worked towards our status as a leading commercial real estate bank in the European core markets, €2.7bn in Q1 amply support this, and we continue to show strong asset quality and continue to show prudent underwriting policy. We don’t want to do stupid things and enter into lofty LTVs and lofty risk engagements prior to volume growth – we always have the principal of conservative risk assessment.”

Almost half of new business (46%) was originated in Germany, followed by the Nordic countries (19%), the United Kingdom (14%) and Spain (10%). The average loan-to-value ratio for new commitments improved slightly, to approximately 61%, compared to 64% for the full year 2014.

The new business increased the bank’s real estate finance loan book by a 8% in the first three months of the year to €23.5bn.

Separately, Arndt remained upbeat about the bank’s dual strategy re-privatisation plans – a private treaty sale and a potential IPO – although he was vague about how the process was going.

“The tender process is so far going to plan and that so far we are very pleased with the outcome which we have so far seen. We also are continuing with our preparations for an IPO and in short in the dual track is on and is moving forward in line with expectations leading to the privatisation of the bank during the course of this year,” Arndt told analysts.

Pre-tax profit for PBB rose 34.2% to €51m year-on-year in the first quarter, despite absorbing a further €79m valuation adjustment on receivables against Austrian wind-down institution Heta, which are guaranteed by the Austrian federal state of Carinthia.

Positive one-off effects and the bank’s good operating performance more than offset this extraordinary burden. Pre-tax return on equity (ROE) in the first quarter was between 7% and 8%, Arndt confirmed.

PBB has terminated its rating agency contracts with two of its three major raters – Fitch Ratings and Moody’s – opting to retain Standard & Poor’s and mandate DBRS.


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