Deutsche Pfandbriefbank (PBB) reported a 16% rise in real estate lending to €10.4bn in 2015, a level the bank expects to match in 2016, despite warning of further margin compression and potential increases to its funding costs.
In the bank’s first annual results posted by PBB since its IPO completed last July, the REF division posted strong pre-tax profits of €206m, but this fell to €195m at the Group level, after and a €30m pre-tax loss in its non-core €18.7bn ‘value portfolio’ and a modest €13m pre-tax profit are included.
PBB reported that in 2015 a broadly favourable market environment continued to attract new financing providers, particularly non-banks, resulting in increased competition and margin compression.
This increased competition is expected to continue to drive downward pressure on senior margins over the course of the year although this to “stabilise to some extent”, PBB reported today.
Perhaps of greater concern is the expectation that Pfandbrief spreads will increase in 2016 in response to lower current demand from financial investors at present yields. Any increase in PBB’s funding costs would consequently narrow the profitability of its loans extended.
PBB expects to further supplement profits in 2016 through the growth of its syndication and placement business, suggesting and approximate increase of one-third on the €0.8bn recorded in 2015.
Thomas Köntgen, PBB’s co-CEO and Treasurer, added: “We want to continue leveraging our structuring expertise for more complex – and hence, higher-margin – financings, without higher risk exposure.
“In addition, we plan to make careful adjustments to our product and country mix, to reflect a changing business environment, in line with our risk strategy. We want to generate additional income through a stronger focus on the syndication business, and on partial placements of financings. We also strive for broader diversification in terms of regions and products in our funding business.”
PBB closed 180 CRE loans in 2015, up from 161 in 2014, at a slightly improved average maturity (circa 5.7 years), but a notable 30 basis points reduction in the average gross margin to 170 bps.
The margin averages mask the differences between asset quality and income profile within PBB’s new business book.
More anecdotally, the sharpest margins for core, stabilised city offices in Frankfurt and London, let to strong tenants on long leases and owned by sophisticated investors, remains below 150 bps.
PBB reported that its ‘strategic portfolio’ – comprised of REF and PIF – rose 10% to €31.3bn, despite high early repayments. PBB’s REF portfolio rose 10% to €24.0bn, on a net basis.
This loan book translates to €25.8bn on an exposure at default basis under Basel II, which by geography is 47% secured by German CRE (€12.1bn); 19% secured by UK CRE (€4.9bn); and 12% secured by CRE in France (€3.1bn).
In its guidance for 2016, PBB indicated that the robust demand for CRE investment in its core European markets would although the bank to target a broadly equal €12.0bn in new business next year.
While this figure is not broken down between REF and PIF it would be reasonable to assume a broadly equally split, which would imply new real estate finance loans in the region of €10.4 again for 2016.
Assuming 2015’s geography split is seen as a guide to this year’s new lending ambitions, then this would imply a UK CRE lending appetite of €1.87bn (£1.45bn). It remains to be seen whether a Brexit would affect PBB’s appetite to lend against UK commercial property.
For the year 2016, PBB anticipates pre-tax profit slightly below the €195m figure achieved this year. First-quarter results are likely to be somewhat weaker in comparison, as a result of the bank levy which is accounted for in the first quarter, PBB said.
Andreas Arndt, PBB’s co-CEO and CFO, said: “A key milestone for 2015 was PBB’s privatisation, which we achieved through the flotation. At the same time, PBB generated its highest operating results yet in 2015. 2016 will present particular challenges, both in terms of regulation and the market environment.
“Nonetheless, we expect good pre-tax profits, which however are likely to be slightly lower than the very good figures posted in the previous year.