DBRS Upgrades pbb’s Long-Term Issuer Rating to BBB (high), Stable Trend

DBRS Ratings GmbH (DBRS) upgraded the Long-Term Issuer ratings of Deutsche Pfandbriefbank AG (pbb or the Bank) to BBB (high). The Short-Term Issuer Rating was upgraded to R-1 (low). pbb’s intrinsic assessment (IA) is now BBB (high). The support assessment for the Bank is SA3. The trend on all ratings is Stable. A full list of ratings can be found at the end of the press release.

KEY RATING CONSIDERATIONS
The upgrade reflects DBRS’s view that the Bank has demonstrated its ability to maintain a well-managed risk profile and that pbb’s regulatory capital ratios have shown resilience despite changes in the regulatory framework, whilst taking into account the Bank’s more cyclical business model. pbb’s ratings continue to reflect that the Bank has a steady but concentrated core franchise which is a cyclical, monoline business model, its good levels of new business generation and its importance as a prominent Pfandbrief issuer.

RATING DRIVERS
Further positive rating pressure is unlikely in the medium term given the recent rating action, the monoline nature of the business model and the current stage of the credit cycle.

The ratings could be negatively impacted by factors such as i) a meaningful deterioration in credit quality and underwriting standards, and ii) a significant drop in profitability, or iii) an unexpected drop in capital levels.

RATING RATIONALE
DBRS considers that pbb has a strong core franchise in European commercial real estate financing while also noting that it remains a cyclical monoline business model. DBRS notes pbb’s cautious re-entry into the US market since the second half of 2016, promoting an expanded geographical footprint and increased diversification.
In DBRS’s view, the Bank’s overall adequate financial performance reflects its recurring levels of solid new business generation against the background of high competition, margin pressure and the scheduled run-off of its public sector legacy portfolio. pbb’s earnings power continues to benefit from very low impairment levels and tight cost management.

FY2018 net revenues increased to EUR 456 million from EUR 415 million a year earlier due to portfolio growth. pbb benefitted from lower funding costs as well as lower administrative costs. Provisions increased somewhat year-on-year (YoY) from EUR 10 million to a still low level of EUR 14 million. As a result, pre-tax profit was EUR 215 million versus EUR 204 million a year earlier. However, due to a higher tax rate, net income was slightly lower at EUR 179 million compared to EUR 182 million in FY2017.

DBRS notes that pbb’s credit performance has been solid since 2010. In FY2018 the gross non-performing (NPL) ratio was 0.8%, up slightly from 0.6% a year earlier, but still very low, reflecting the benign credit environment in pbb’s markets. Credit concentration risk, arising inevitably from its monoline CRE business model, is, in DBRS’s view, balanced by sound credit performance and strict credit discipline. The average loan-to-value (LTV) ratio of new loans in pbb’s Real Estate Finance (REF) portfolio was 59% in FY2018, down somewhat from 60% a year earlier. DBRS also notes a lower allocation of new business in the UK has been offset by an increasing US lending share as well as a higher proportion of new lending to the Office sector rather than to the Retail/Shopping sector. The global CRE market at this point is highly competitive. Vacancies are low and rents are high, keeping NPL ratios low, however, strong price increases for most types of properties have pushed yields down.

DBRS considers the Bank’s funding and liquidity profile as good. The balance sheet is predominantly wholesale funded via secured mortgage and public sector Pfandbriefe, however, DBRS considers it to be a more stable form of market funding and aligned with the Bank’s business model. In FY2018 the trend of lower funding costs in both its mortgage Pfandbrief and its unsecured issuances continued from the previous year, benefitting the Bank’s margins. The Liquidity Coverage ratio (LCR) was a very high 212% at end-FY 2018, well exceeding the 100% minimum requirement.
DBRS views pbb’s capitalisation as good, whilst noting that higher capital ratios are appropriate given the Bank’s business model. This assessment also incorporates DBRS’s view that the currently very high fully loaded Basel III Common Equity Tier 1 (CET1) ratio of 18.8% will gradually reduce over the medium-term, driven by rising wisk-weighted assets (RWAs), business growth and regulatory requirements (including TRIM, changes in EBA guidelines and the introduction of Basel IV). The Bank’s fully loaded CET1 SREP requirement for 2019 is 9.85%, leading to a strong SREP buffer of 895 bps at 1Q19. This, in DBRS’s view, leaves the Bank well positioned with regards to its capital levels going forward.
The Grid Summary Grades for Deutsche Pfandbriefbank AG are as follows: Franchise Strength – Good/Moderate; Earnings – Good/Moderate; Risk Profile – Good; Funding & Liquidity – Good; Capitalisation – Good.

Notes:
All figures are in Euros unless otherwise noted.

DBRS Morningstar notes that this Press Release was amended on June 4, 2020, to correct the Short-Term Issuer Rating in the first paragraph.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2019). This can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include company documents, SNL financial, the German Ministry of Economy and Finance (MEF), the European Commission (EC) and the European Central Bank (ECB). DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

This rating did not include participation by the rated entity or any related third party and is based solely on publicly available information.

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 historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings GmbH are subject to EU and US regulations only.

Lead Analyst: Sonja Förster, Vice President - Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG - Global FIG
Initial Rating Date: July 19, 2006
Last Rating Date: July 27, 2018

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

For more information on this credit or on this industry, visit www.dbrs.com.