Deutsche Pfandbriefbank's Outlook Raised from Negative to Stable
Investing.com -- S&P Global Ratings has revised Deutsche Pfandbriefbank AG's (PBB) outlook from negative to stable and affirmed its long-term and short-term issuer credit ratings of 'BBB-/A-3'. The rating agency also confirmed PBB's long-term and short-term solution counterparty ratings of 'BBB/A-2' and all issuance ratings.
The change in outlook is driven by expectations of stabilization in commercial real estate (CRE) valuations and transaction volumes in the US and Europe. This situation reduces the risk of further significant deterioration in asset quality for PBB. The bank's portfolio risk reduction undertaken in 2024 strengthens its resilience against potential market fluctuations. However, significant risks remain in the US office and German development portfolios, although these are expected to be met with pre-provision income.
PBB's strong capital, resilient funding and liquidity profile, and solid loss absorption buffers support its credit profile. The bank's asset quality is seen to have stabilized particularly due to risk reduction activities carried out in 2024.
By 2025, PBB is expected to make concrete progress in its 2027 strategy. This strategy aims to gradually reduce concentration in the CRE portfolio and decrease dependence on net interest income by providing real estate investment services to institutional investors. The strategy also targets managed assets of €4 billion-€6 billion through organic growth and acquisitions of smaller asset management providers by 2027.
PBB continues to strengthen its capitalization with an estimated risk-adjusted capital ratio of approximately 13% by the end of 2024, up from 11.8% in 2023 according to S&P Global Ratings. The bank has excess capital that can be used for targeted growth in asset management.
Investor confidence in PBB has largely recovered, and funding spreads have returned to more sustainable levels. PBB's strategic funding mix, consisting of 50% secured bonds and 50% retail deposits and unsecured bonds, is expected to provide a stable funding profile.
In a solution scenario, PBB's priority investors continue to benefit from high loss absorption capacity. The bank is expected to reduce its additional loss absorption capacity (ALAC) buffer to approximately 700 basis points of S&P Global Ratings' risk-weighted assets by the end of 2026 due to the maturation of minimum own funds and eligible liabilities (MREL) instruments.
The stable outlook reflects S&P's view that PBB will absorb the ongoing challenges posed by weak CRE markets with pre-provision earnings over the next two years.
S&P could downgrade the ratings within the next two years if CRE markets show renewed signs of stress, strategic revisions to PBB's business model do not enhance its resilience, or a decline in investor confidence significantly restricts PBB's access to the market at reasonable spreads for an extended period. An upgrade seems distant and would require PBB to significantly improve its business diversification and resilience, substantially increase its fee income contribution, and significantly reduce its non-performing loans.
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