DBRS Ratings GmbH (DBRS Morningstar) confirmed the Long- and Short-Term Issuer Ratings of Deutsche Pfandbriefbank AG (pbb or the Bank) at BBB (high) / R-1 (low). The trend on pbb’s long-term and short-term ratings was changed to Stable from Negative. pbb’s intrinsic assessment (IA) was maintained at BBB (high). The support assessment for the Bank is SA3. A full list of ratings can be found at the end of the press release.
KEY RATING CONSIDERATIONS
The change of the trend to Stable from Negative considers that the adverse economic impact from the COVID-19 pandemic has not translated into a notable deterioration in pbb’s credit metrics and the Bank has continued to report reasonable levels of profitability and asset quality. Given rising interest rates and the current economic slowdown, there still remains potential for downside risk for pbb’s more cyclical real estate lending, as a decline in demand would reduce rents and valuations for certain commercial real estate segments, which may result in lower revenues and credit deterioration. However, DBRS Morningstar notes that pbb has managed the portfolio conservatively and reduced risk in recent years by lowering exposure to segments that carry higher risk.
The confirmation of pbb’s ratings reflects the Bank's well established, albeit narrow, franchise and expertise in commercial real estate, sound underwriting, and capital cushions well above regulatory minimum requirements. Capital ratios already incorporate the expected effect of Basel IV on risk weighted assets (RWA). The ratings also reflect pbb’s solid liquidity profile, supported by the Bank's established Pfandbrief (covered bond) funding programme, as well as access to ECB funding.
An upgrade of the ratings is unlikely given the limited business diversification. The ratings would be upgraded if the Bank significantly improves profitability, while maintaining a conservative risk profile.
The ratings would be downgraded due to a marked deterioration in credit quality, a significant drop in profitability, or a material drop in capital levels.
Franchise Combined Building Block (BB) Assessment: Good / Moderate
pbb is a specialist bank focused on commercial real estate (CRE) and public investment financing with core operations in Germany, the United Kingdom, and France complemented by operations in the Nordic Countries, Central and Eastern Europe (CEE) and the US. More than half of pbb’s portfolio consists of CRE lending, which is also the biggest contributor to earnings. pbb’s earnings streams are constrained by its narrow business focus and mostly consist of net interest income. Asset quality is linked to the commercial real estate cycle. The limited scope of pbb’s activities highlights the importance of maintaining strict credit discipline.
Earnings Combined Building Block (BB) Assessment: Good / Moderate
In DBRS Morningstar’s opinion pbb’s profitability compares favourably with German peers, but less well with international peers. The COVID-19 pandemic had a limited impact on pbb’s earnings in 2021. Net profit was EUR 228 million, up significantly from EUR 121 million a year earlier as loan provisions normalised and the Bank benefitted from factors such as TLTRO III and high prepayment fees. The Bank’s reported an ROE of 7.0% in 2021 and 3.6% in 2020. pbb’s earnings softened in Q1 2022 with pre-tax profit of EUR 42 million down from EUR 52 million a year earlier, as NII remained fairly stable at EUR 122 million while pre-payments revenues declined and loan loss provisions increased to EUR 18 million from EUR 10 million a year earlier. The cost/income ratio remained below 40% which is at the low end of peers. Going forward, profitability could be adversely affected by a deteriorating economic outlook and higher interest rates resulting in lower demand for CRE and weaker asset quality, possibly requiring loan modifications and elevated provisioning levels.
Risk Combined Building Block (BB) Assessment: Good / Moderate
In DBRS Morningstar's opinion, pbb has maintained a sound risk profile. However, credit concentration risk is high and CRE lending has the potential to deliver outsized credit losses, particularly if real estate markets deteriorate. Rising rates, and a slowing economy could lead to a drop in collateral values and increased credit risk related to pbb’s customers. pbb’s NPL ratio as calculated by DBRS Morningstar has gradually increased from 0.6% at end-2017 to 1.5% at end-2021, albeit still at a relatively low level. Most of the NPLs accrue to the REF segment and within REF to UK property in particular. However, the YoY increase of EUR 110 million to EUR 580 million is attributable to increases in various other countries. The coverage ratio as calculated by DBRS Morningstar, has increased from 41% in 2017 to 58% in 2021, which we consider prudent given the elevated property values. Given rising rates, a weakening economy, high inflation and elevated building costs as well as delays in construction due to supply chain disruptions, the NPL ratio could edge up further.
Funding and Liquidity Combined Building Block (BB) Assessment: Moderate
pbb’s funding profile is predominantly reliant on wholesale funding. However, reflecting its asset mix, the relative stable German Pfandbrief market is pbb’s main source of funding, adding to the resiliency of pbb’s funding profile. The Bank also relies on unsecured debt, customer and retail deposits, and liabilities to banks. pbb launched an online platform in early 2013 to gather retail deposits, although at EUR 3.2 billion in Q1 2022 it complements pbb’s funding base, but does not materially change the wholesale funding nature of the Bank. At end-2021, the Net Stable funding ratio was 118% and the Liquidity Coverage Ratio was 227%, both well above regulatory requirements.
Capitalisation Combined Building Block (BB) Assessment: Strong / Good
DBRS Morningstar views pbb’s capitalisation as solid, while noting that significant capital cushions are important given the Bank’s business model, a possible increase in risk-weighted assets (RWA) due to rating migration. At the end of Q1 2022, the Bank’s fully phased-in Common Equity Tier 1 (CET1) ratio was 16.9% up from 15.4% a year earlier as RWAs decreased from EUR 18.3 billion to EUR 16.7 billion The CET1 ratio already incorporates regulatory changes with regards to Basel IV, and compares to a CET1 SREP ratio requirement as of 1 March 2022 of 8.41%. This provides the Bank with a CET1 buffer of 849 bps. However, the Bank will have to comply with a countercyclical and a sectoral systemic risk buffer by 1 February 2023, which is anticipated to add 20-25 bps to minimum CET1 requirements.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/397333
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
DBRS Morningstar notes that this Press Release was amended on May 27, 2022 to incorporate the unsolicited non-participating rating status.
All figures are in EUR unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (19 July 2021) https://www.dbrsmorningstar.com/research/381742/global-methodology-for-rating-banks-and-banking-organisations. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022) https://www.dbrsmorningstar.com/research/396933/dbrs-morningstar-publishes-final-methodology-for-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings
The sources of information used for this rating include Morningstar Inc. and Company Documents, pbb 2017-2021 Annual Reports, pbb 2021 and Q1 2022 Presentations, pbb Q1 2022 Quarterly Report. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.
With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.
With Rated Entity or Related Third-Party Participation: NO
With Access to Internal Documents: NO
With Access to Management: NO
DBRS Morningstar 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.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.
For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.
The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/397332
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: Sonja Förster, CFA, Vice President - Global FIG
Rating Committee Chair: Elisabeth Rudman - Managing Director, Head of European FIG - Global FIG
Initial Rating Date: July 19, 2006
Last Rating Date: May 28, 2021
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