In response to the enduring challenges in the commercial real estate sector, Deutsche Pfandbriefbank AG (“pbb”) has taken substantial measures to bolster its risk provisioning.
The reported risk provision result for the initial nine months of the 2023 fiscal year reached € -104 million, a marked increase from € -38 million recorded in the corresponding period of the previous year. The pre-tax profit stood at €91 million, as per consolidated figures adhering to IFRS standards (unaudited), indicating a decline from €159 million reported in the same period of the preceding year.
Despite the escalation in risk provisioning and the implementation of additional investments as part of the bank’s ongoing strategic program, pbb foresees a pre-tax profit ranging between €90 million and €110 million for the current fiscal year, based on consolidated figures in accordance with IFRS standards.
This projection represents a notable deviation from the earlier forecast issued at the onset of 2023, where pbb had envisaged pre-tax profits falling within the span of €170 million to €200 million. Despite prevailing market challenges and the substantial expenditures directed towards the Group’s strategic advancement throughout 2023, pbb Group remains optimistic about achieving favorable outcomes for the year.
“We anticipate a stabilization of real estate markets only in the initial half of 2024,” remarked Andreas Arndt, CEO of pbb, highlighting the prolonged duration required to ascertain a balanced pricing equilibrium within the market. “
The protracted nature of this discovery process led us to make the decision to substantially augment risk provisioning as early as the third quarter,” Arndt continued. Despite revising our guidance for the entirety of 2023, we maintain our expectation of sustaining profitability.
Given the prevailing challenges in the real estate markets, pbb foresees a departure from the practice of distributing special dividends, a departure from previous years. However, the comprehensive dividend proposal remains contingent upon the terms outlined in pbb’s dividend policy, and a final decision will be reached and communicated alongside the disclosure of our full-year results in 2023.
For a considerable period now, the bank has been aligning its capital reporting in accordance with Basel IV standards. By delineating its Basel IV orientation, pbb aims to transition to the Foundation Internal Ratings-Based Approach (F-IRBA) in the future, subsequent to the implementation of Basel IV.
This intention has been communicated to the European Central Bank. The F-IRBA model is slated to be adopted as the principal model and risk standard for the majority of the portfolio, particularly in the realm of commercial real estate finance.
Until the enactment of the new regulations, standardized model parameters will be utilized, potentially resulting in a temporary reduction of the CET1 ratio. In light of the persistently challenging conditions in the commercial real estate markets, this adjustment is seen as adequately anticipatory of any market-driven changes in parameters.
In aggregate, this transition is expected to yield more resilient regulatory capital ratios moving forward. Upon the transition to the F-IRBA model, the CET1 ratio is projected to revert to approximately 15 percent.
In the third quarter, Deutsche Pfandbriefbank AG (pbb) made a noteworthy decision to fully reverse the residual €28 million management overlay. This decision was prompted by the materialization of uncertainty factors that were initially anticipated within the management overlay during the period under review.
These factors were meticulously factored into the determination of risk provisioning, prompting the full reversal of the overlay.
Given the prevailing circumstances and the prudent risk management approach adopted by pbb, the bank has revised its guidance for the current year.
This revised guidance takes into account the possibility of additional risk provisioning that may be necessitated in the fourth quarter. This includes the potential allocation of a new management overlay, reflecting the bank’s commitment to maintaining robust risk mitigation measures in response to evolving market conditions.
