DBRS: pbb’s 2013 Earnings Reflect Progress towards Privatisation

• Growth in business volumes underscores the viability of pbb’s franchise
• Diversity of portfolio remains stable with German risk as the largest portion
• Improved funding track-record, complemented by on line deposits growth
• Regulatory capital strengthened via retained earnings and lower RWAs
• DBRS rates pbb A (low), benefitting from two notches of support, trend Negative

Deutsche Pfandbriefbank AG (the Bank or pbb) announced preliminary 2013 results which were above the Bank’s target. This outcome reflected improved interest earnings, greater cost efficiency, as well as several one off items. While the sharp increase in pre-tax income (+33%) mostly resulted from one-offs, underlying net interest income (NII) grew 4.6% led by improved margins on new business. In DBRS Ratings Limited (DBRS)’ view, overall performance signals further progress in strengthening the Bank’s franchise and preparing the financial groundwork for planned privatisation in 2015.

For the full year 2013, pbb reported a strong 46% increase in new business. Growth was concentrated principally in the real estate finance (REF) area which grew to EUR 7 billion for the year (up from EUR 4.9 billion one year earlier). Public Investment Finance (PIF) business increased strongly during the year with new business of EUR 1.2 billion. The higher business volumes were supported by pbb’s successful funding efforts in both the secured and unsecured markets. New long-term funding for the year increased by 18% to EUR 7.7 billion (compared to EUR 6.5 billion last year). More than half (EUR 4.5 billion) was raised in the Pfandbrief market, with EUR 3.2 billion coming from unsecured issuance, with maturities reaching well beyond 2015. In DBRS’ view, this is an important indication of market confidence in the Bank’s business plan post privatisation. In addition, funding benefited from roughly EUR 1 billion in new on-line deposits collected via pbbdirekt.com over the past twelve months to March 2014. pbb continues to be dependent on senior unsecured financing but DBRS notes that maturities on new financing exceed those on new business.
The Bank’s expanded asset portfolio continued to reflect pbb’s geographic focus, with Germany representing the single largest market, and key holdings in other stable European markets including France, the UK and the Nordics. By asset type, the real estate portfolio remained balanced, with major exposures to the office, retail and residential markets. In the public sector finance portfolio, the mix continued to reflect local authorities, sovereigns, public sector entities and financial institutions. Across both portfolios, the total problem portfolio exposure at default declined to EUR 940 million from EUR 1.1 billion the prior year.

The Bank has been profitable since 3Q10 (the last 14 quarters) and the NII has improved, but pbb continues to demonstrate constrained profitability with 0.22% pre-tax return on assets as of year-end 2013 (0.13% the prior year).

Importantly, pbb’s regulatory capital ratios strengthened due to ongoing retention of earnings and the winding down of non-strategic public budget finance assets. At year-end 2013 (but not yet including 2013 profit), pbb reported a Basel II tier 1 capital ratio of 20.3% up from 18.9% the previous year. On a ‘simulated pro-forma’ fully phased in Basel III basis for end January 2014, the Bank reported a CET1 ratio of 11.6%.

DBRS rates pbb A (low), which reflects a two notch uplift from the Intrinsic Assessment (IA) of BBB which is linked to the Bank’s current ownership. The IA of BBB reflects the challenges which remain on the way towards privatization. The Negative trend reflects the potential for lower future support following privatisation.

Notes:
All figures are in (EUR) unless otherwise noted.

[Amended on December 23th, 2014 to remove unnecessary disclosures.]