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The phoenix

  • 02 Jun 16

We have initiated coverage of the German Deutsche Pfandbriefbank AG (pbb) with a price target of €10.05 per share and a REDUCE recommendation. pbb is a mortgage bank with a business focus on commercial real estate and public investment finance. Positive items are: • The property market in Germany is booming. The vdp property price index in Germany has increased every year since 2010 for both residential properties and commercial properties. The index increased by 5.0% for FY2015. • pbb seems to have no problem in fulfilling the future Basel 3 fully-loaded CET1 targets. The Basel 3 fully-loaded CET1 ratio was 18.1% at the end of March 2016. pbb is targeting a higher single-digit RoE and Basel 3 fully-loaded CET1 of above 12.5% mid-term. pbb has obviously some excess capital. However, management does not intend currently to give it back to the shareholders. The payout-ratio target remains at 40% to 50%. Much lower than the new 70% to 80% payout-ratio target of German peer Aareal Bank (see corporate governance item below). The concerns are: • The real estate finance business is cyclical. The predecessor of pbb, HRE, had to be rescued and nationalised by the German state in 2009 during the financial market crisis. The better business part of bankrupt HRE was bundled into pbb by the German state. pbb had to be listed via an IPO on the German stock exchange in July 2015 (EU condition). • The earnings development of pbb has been quite volatile since 2011 due to different one-off effects. pbb benefited from a tax credit in FY2015 and could benefit from a pre-tax gain of €132m in FY2016 due to the write-back of Heta’s debt securities. pbb has benefited from low or no loan loss provisions due to considerable reversals in the last few years. This is likely to change mid-term. • pbb is targeting a higher single-digit RoE mid-term. This target is well below the targets which universal banks promise. But it is much better than what Deutsche Bank or Commerzbank has delivered over the last few years. • pbb has a non-strategic portfolio: the Value Portfolio (VB, volume €18.7bn at the end of 2015). VP contains the old style public finance (HRE) business which should deliver a pre-tax loss of around €10m to €15m p.a. to group profit over next few years. • The IPO of pbb is a paradigm change regarding corporate governance in our view as the targets of a public bank and a commercial bank are quite different. The transformation should be closed with the sale of the remaining 20% stake owned by the German state.