DBRS Confirms Deutsche Pfandbriefbank AG at BBB, Stable Trend

DBRS Ratings Limited (DBRS) has today confirmed the Senior Unsecured Long-Term Debt & Deposit rating of Deutsche Pfandbriefbank AG (pbb or the Bank) at BBB and the Bank’s Short-Term Debt and Deposit rating at R-2 (high). pbb’s intrinsic assessment (IA) remains BBB and the Bank’s Subordinated Debt has been confirmed at BBB (low).

DBRS considers that the Bank’s BBB IA is supported by the strength of pbb’s core franchise, as demonstrated by recent new business generation and the track-record of pbb as Germany’s largest Pfandbrief issuer, whilst at the same time noting that the Bank’s main lending sector - commercial real estate - is an inherently cyclical business. In maintaining an IA of BBB for pbb, DBRS confirms its view that the Bank has made continued progress in strengthening its business model as illustrated by pbb’s reduced risk profile, good regulatory capital position, and sustained profitability. However, DBRS also notes that pbb’s business remains challenged by strong competition and the on-going low interest rate environment.

The Bank has maintained stable core operating performance over the last five consecutive years, and in 1Q16 profit before tax reached EUR 45 million based on consolidated IFRS figures. The operating result has continued to benefit from a good level of new business which is currently mitigating the weaker net interest income, as well as from the absence of loan loss provisions due to the benign point in the credit cycle. The sustainability of the underlying franchise has been demonstrated by substantial annual new business generation over the 2010-2015 period. Lending margins on new business have flattened in 1Q16 while loan to value ratios (LTVs) in the strategic Commercial Real Estate portfolio, in which the Bank finances commercial real estate properties, such as office buildings, residential housing and logistic properties mainly in Germany, Great Britain and France, have slightly improved.

DBRS notes that the Bank’s solid performance has benefitted from ongoing cost discipline and the further run-down of the low-yielding value portfolio. In addition, DBRS expects possible positive value adjustments of roughly EUR 132 million from pbb’s EUR 395 million nominal Heta (Heta Asset Resolution AG) exposure. The value adjustments might materialise after the recent settlement in mid-May 2016 between the Austrian government and pbb as part of a larger group of Heta creditors is finalised.

pbb’s risk profile has been steadily improving in the recent past and is reflected in a manageable level of problem loans which, adjusted for the Heta exposure, fell to EUR 397 million at 1Q16 translating into an adjusted problem loan ratio of 0.6%.

DBRS considers the Bank’s funding and liquidity profile as aligned with its business model. The balance sheet is predominantly wholesale funded via secured mortgage and public sector Pfandbriefe. Unsecured issues also account for a significant funding component, although the Bank has also initiated an online platform for retail deposits in 2013 which, however, with a volume of EUR 3.1 billion as of 1Q16 accounted for approximately only 5% of total liabilities. Overall the Bank remains dependent upon access to unsecured wholesale funding. DBRS notes that pbb issued EUR 4.5 billion of long-term funding in 2015 (roughly 40% through Pfandbriefe; 60% unsecured).

pbb reported a strengthened fully loaded Basel III Common Equity Tier 1 (CET1) of 18.2% at year-end 2015 and remained 18.1% as of 1Q16. The Bank’s Risk-Weighted Assets (RWAs) density stands currently at a low of 20% with EUR 13.3 billion RWAs driving EUR 68.1 billion of total assets and with a leverage ratio of 3.8% (fully loaded). The Bank’s higher capital ratios are held as a buffer to mainly manage upcoming regulatory increases in RWA weightings.

Concurrently, DBRS has upgraded the rating of Hypo Real Estate International Trust I to BB (high). The rating on the securities is now two notches below pbb’s IA of BBB. This reflects DBRS’ approach of notching perpetual, non-cumulative Tier 1 instruments two notches below the IA. DBRS, previously rated the instrument an additional notch lower to reflect the fact that payments had been skipped on the instrument. These payments were resumed on June 14, 2016.

RATING DRIVERS
A material strengthening of the Bank’s financial position, accompanied by the maintenance of strict credit discipline, the successful run down of the value portfolio and greater diversification would help to support the BBB Intrinsic Assessment.

The ratings could be negatively impacted by factors such as deterioration in credit quality standards, an adverse weakening of the liquidity profile, alterations in the business model or the financial profile and/or targets.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (December 2015). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2016) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016). These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial and company reports. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: George Yiannakis
Rating Committee Chair: William Schwartz
Initial Rating Date: July 19, 2006
Most Recent Rating Update: September 29, 2015

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