DBRS Confirms Deutsche Pfandbriefbank AG at BBB, Trend Revised to Positive

DBRS Ratings Limited (DBRS) confirmed the Long-Term Issuer Rating of Deutsche Pfandbriefbank AG (pbb or the Bank) at BBB and the Short-Term Issuer Rating at R-2 (high). pbb’s intrinsic assessment (IA) remains BBB and Subordinated Debt has been confirmed at BB (high). The support assessment for the Bank is SA3. The trend on all ratings was changed to Positive from Stable.

KEY RATING CONSIDERATIONS
The change in the trend to Positive reflects DBRS’s view that the Bank continues to demonstrate a well-managed risk profile and that the Bank’s capitalisation levels are now exposed to lower uncertainty from changes of the wider regulatory framework. In particular the Bank has successfully absorbed the recalibration of asset risk weights under the ECB’s ‘harmonization of risk models’ initiative. The change in trend also reflects DBRS’s view that pbb’s regulatory capital ratios have shown resilience and compare well against BBB-rated peers, whilst also 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 solid new business generation and its importance as a prominent Pfandbrief issuer.

RATING DRIVERS
Maintaining strong Bank capitalisation levels in the face of ongoing regulatory changes, strengthening of the Bank’s earning power, accompanied by the maintenance of strict credit discipline, could lead to further positive rating pressure.

The ratings could be negatively impacted by factors such as i) deterioration in credit quality and underwriting standards, and ii) credit negative alterations in the business model.

RATING RATIONALE
DBRS considers that pbb has a strong core franchise in European commercial real estate financing whilst also noting that it retains a cyclical monoline business model. DBRS notes positively pbb’s cautious re-entry into the US market in 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 solid new business generation against the background of high competition, margin pressure and the scheduled run-off of its value-portfolio (legacy). pbb’s earnings power continues to benefit from very low impairment levels and tight cost management. The Bank reported 1Q18 net income of EUR 39 million (1Q17: EUR 38 million) based on consolidated IFRS figures. The 1Q18 underlying result was mainly driven by i) stronger net interest income (NII) in 1Q18 of EUR 108 million (1Q17: 100 million) helped by reduced funding costs, an increased financing volume in pbb’s core portfolios and changes in pbb’s regional and business mix, ii) a positive net result from risk provisioning of EUR 4 million (neutral result in 1Q17) reflecting the benign point of the credit cycle in pbb’s core markets in Germany and Northern Europe and iii) stable operating expenses in 1Q18 of EUR 44 million (1Q17: 45 million) reflecting ongoing cost discipline.

The Bank’s risk profile has, in DBRS’s view, remained stable. pbb’s problem loan ratio stands at a low of 0.4% at 1Q18, unchanged from FY2017. 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. Loan to value ratios (LTVs) of new loans in pbb’s Commercial Real Estate lending portfolio remained at an average LTV of 62%. We note positively pbb’s alterations to its regional lending footprint, with a lower allocation of new business in the UK offset by an increasing US lending share and some changes in product mix, with a higher proportion of new lending to the Office sector and a lower proportion to the Retail/Shopping sector.

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 which DBRS considers as a more stable form of market funding. In 1Q18 the trend of a significant reduction in funding costs in both its mortgage Pfandbrief and its unsecured issuances continued from the previous year, benefitting the Bank. In addition, pbb successfully completed in April 2018 an inaugural EUR 300 million issuance of Additional Tier 1 capital, further enhancing its capital structure.

DBRS views pbb’s capitalisation as good, supported by a fully loaded Basel III Common Equity Tier 1 (CET1) of 18.8% in 1Q18 (17.6% at end-2017), and a fully loaded leverage ratio of 4.8% (4.5% at end-2017). Regulatory ratios have been strengthened over the previous years, despite a substantial 12% increase (or EUR 1.5 billion) in risk-weighted assets (RWA), which was driven by the ECB’s ongoing asset risk weight recalibration exercise. Looking ahead, DBRS expects a gradual easing of the Bank’s regulatory capital ratios over the medium-term, driven by rising RWA, reflecting business growth and further internal model adjustments. The Bank’s fully loaded CET1 SREP requirement for 2018 is 9.95% CET1 (phase-in: 9.325%), implying a strong SREP buffer of 885 bps at 1Q18. 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.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017). 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 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.

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 Limited are subject to EU and US regulations only.

Lead Analyst: George Yiannakis, Vice President - Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG, Global Financial Institutions Group
Initial Rating Date: July 19, 2006
Most Recent Rating Update: June 9, 2017

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