Faced with the persistent weakness in the commercial real estate market, Deutsche Pfandbriefbank AG (“pbb”) has significantly increased its risk provisioning. The risk provision result for the first nine months of the 2023 financial year amounted to € -104 million (9M2022: € -38 million). Pre-tax profit was €91 million (consolidated figures following IFRS, unaudited), compared with €159 million in the prior-year period.
Despite the increased risk provisioning as well as additional investments within the scope of the bank’s ongoing strategy programme, pbb anticipates a pre-tax profit of between €90 million and €110 million (consolidated figures under IFRS) for the current financial year. In its forecast issued at the beginning of 2023, pbb had anticipated profit before taxes in a range between €170 million and €200 million. This means that even in the current market environment and despite extensive expenditure incurred in 2023 for the Group’s strategic development, pbb Group expects to achieve positive results this year.
“We are only expecting a stabilisation of real estate markets during the first half of 2024,” said Andreas Arndt, CEO of pbb, noting that “the process to discover a balanced market pricing level is taking longer than expected. This is why we decided to significantly increase risk provisioning already in the third quarter. Whilst we have lowered our guidance for the full year 2023, we nevertheless expect to remain profitable.”
Taking into account the challenging situation in the real estate markets, pbb assumes that unlike in previous years, a special dividend will not be distributed. However, the overall dividend proposal remains subject to the conditions of pbb’s dividend policy and will be decided upon and communicated together with our full-year results in 2023.
For some time now, the bank has aligned its capital reporting to Basel IV. In specifying Basel IV orientation, pbb intends to move to the so-called Foundation Internal Ratings-Based Approach (F-IRBA) in the future – i.e. after Basel IV has come into effect – and has informed the European Central Bank accordingly. F-IRBA would be introduced as the relevant model and risk standard for the major part of the portfolio. pbb assumes that this will be the leading model standard in the future, particularly for portfolios in the area of commercial real estate finance. Until the new rules come into effect, standardized model parameters will be used, which may lead to a temporary reduction of the CET1 ratio. The bank assumes that – due to the ongoing difficult situation in the CRE markets – this also adequately anticipates a market-related change in parameters. Overall, this will lead to more stable regulatory capital ratios in the future. With the change to the F-IRBA, the CET1 ratio is expected to return to around 15 percent.
pbb plans to increasingly diversify its business model in the years to come, establishing a broader foundation for future revenue growth and increased profitability. The bank aims to increase the return on equity before taxes to more than 10 percent by year-end 2026. Besides continued organic growth in its core business and even stricter pricing concerning risk, the key pillars of pbb’s strategy are a significant expansion of capital-light commission-based business through Investment Management and a further diversification of the funding base through higher retail deposits. With all these initiatives, pbb is also focusing on the overarching topics of Green Finance and digital transformation, whilst pursuing an extensive cost-cutting programme.
pbb is fully on track to meet the targets of its strategic realignment, to be implemented by the end of 2026. Net interest income was up 20 percent from the previous quarter, and it is expected that it will continue to increase. Portfolio growth in Commercial Real Estate Finance of €1.2 billion (up 4 percent) over the past nine months has been accompanied by rising margins (up 30 basis points compared to 2022). At the same time, overnight and time deposits from retail investors are growing strongly (up €1.5 billion since the beginning of the year – up €3 billion since mid-2022). Demand is particularly strong for time deposits. The cost-cutting programme launched is expected to already show results in 2024. Negotiations with the works council, which are required to implement changes, have been concluded. To improve non-personnel costs, the bank is in the process of entering into new service contracts, at improved terms. Costs are scheduled to fall by approximately €45 million compared to the levels expected for 2023.
The residual €28 million management overlay was fully reversed in the third quarter, since uncertainty factors anticipated in the management overlay have materialised during the period under review, and were accounted for in determining risk provisioning. The new guidance for the current year takes into account potential additional risk provisioning which may be required in the fourth quarter, including the possible allocation of a new management overlay.
