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Pfandbrief market: Distinct rise in issue volume in 2015 – development of sales reflects growth in lending business

  • Pfandbrief banks remain optimistic despite increasing burdens due to regulation: confirmation of good sales figures and continued vibrant lending activity expected in the current year
  • vdp President Jan Bettink: Banks are benefitting from the ongoing boom in the real estate markets and are taking advantage of growth opportunities in new business as they present themselves, yet remain risk-conscious

The Pfandbrief further consolidated its position as benchmark in the covered bond market last year, with sales volumes up again for the first time since the financial crisis and a robust development in spreads. Issuers consistently took advantage of the opportunities for new business that presented themselves in the real estate markets, which continued to experience a boom, and expanded their lending activities significantly. “2015 was a good year for the Pfandbrief, which enjoys the unflagging popularity of investors and issuers alike. Despite the wide-ranging challenges facing them in the market, competitive and regulatory environment, the Pfandbrief banks look to the future optimistically on the whole following a further year of dynamic business development,” said Jan Bettink, the President of the Association of German Pfandbrief Banks (vdp), to sum up.


Sales see considerable jump, volume of Pfandbriefe outstanding bottoms out

After the, in some cases, sizable drops in new issue volumes in previous years, Pfandbrief sales in Germany rose again considerably for the first time: totaling around €58 billion, sales climbed to the highest level since 2011 and exceeded the result of 2014 by 27.5%. Of the Pfandbrief sales generated in 2015, Mortgage Pfandbriefe accounted for €40 (2014: 29) billion or more than two-thirds. Sales of Public Pfandbriefe, which had fallen heavily as the business of public-sector lending increasingly lost importance, has now stabilized as a moderate level. In 2015, they stayed more or less firm at €16 (2014: 15) billion. Ship and Aircraft Pfandbriefe continue to play only a minor role in the current market setting.

Buoyed by the European Central Bank’s covered bond purchase program, benchmark formats have made significant gains in importance. Whereas there were 30 benchmark transactions in 2014, the number went up to 46 in 2015; six of those were Jumbos (i.e. transactions of €1 billion or more). As a result, the total volume of benchmark Pfandbriefe sold climbed from €19.6 billion in 2014 to €26.8 billion last year.

The total volume of Pfandbriefe outstanding fell to €385 (2014: 403) billion as at December 31, 2015. However, the structurally induced decline – which was related solely to Public Pfandbriefe – slowed down perceptibly. Of the total volume outstanding, more than half (€204 billion) was for the first time accounted for by Mortgage Pfandbriefe.

On the basis of a survey conducted among its member banks, the vdp is expecting for the current year a similarly large total issue volume (just over €57 billion) as that in 2015. With roughly the same volume of maturities (€59.3 billion) expected, the vdp member banks are likely to see their first year without an appreciable decline in Pfandbriefe outstanding since 2001.

“With regard to the volume of Pfandbriefe outstanding, after years of structurally induced decline in the issuance of new Public Pfandbriefe we are now seeing a bottoming out. That’s good news for the Pfandbrief as it means that – notwithstanding the historically low interest rates – it can continue to hold its prominent position in the covered bond market in the future, too,” vdp President Jan Bettink commented.


Dynamic growth in lending

Meanwhile, the Pfandbrief banks’ lending activities have seen very dynamic growth amidst the continuing boom in the real estate markets. Growth in new loan commitments gained further momentum last year compared to the year before. In 2015, property finance loan commitments climbed by 18.3 % to €128.0 billion, following growth of 6.3% the previous year. New loan commitments in residential property finance rose by 22.2 % to €66.4 billion. And new lending increased strongly in commercial property finance, too – by 14.3 % to €61.6 billion. By contrast, the consolidation observed for years in public-sector lending persisted in 2015, albeit at a markedly slower pace. New loan commitments dropped from €18.8 billion in 2014 to €18.1 billion; this is equivalent to a 3.7 % decline. Thus, the volume of new lending activity is stabilizing at a lower level. At the same time, it may be seen that public-sector lending, which has lost a great deal of attractiveness for Pfandbrief banks due to the regulatory changes implemented in recent years, also has a good future on this basis – above all, if banks refocus on their traditional business with German borrowers.

“The fundamental factors such as the low-interest-rate environment, the positive economic situation in Germany and the high demand for real estate finance are likely to persist in the current year as well. We are therefore expecting for 2016 as a whole a continuation of the positive development and, again, vibrant lending activity. However, although competition is tough,” Bettink pointed out, “we currently see no signs that the Pfandbrief banks are changing their conservative, risk-conscious lending practices.”


Increasing burdens due to regulation – and many questions not yet answered

Like the financial sector as a whole, the Pfandbrief banks face many challenges in the current market and competitive environment which they are addressing proactively. The also applies to ongoing regulation initiatives, which are already making themselves felt and could potentially bring dramatic additional burdens for specialist institutions in particular – even though their business involves comparatively little risk. For one thing, as with all credit institutions, the costs associated with regulation will continue to rise because, for instance, the capital adequacy requirements will become increasingly strict, while the internal costs of implementing the supervisory requirements will likewise keep on rising.

Second, the ongoing regulatory initiatives could have a marked impact, above all, on the Pfandbrief banks’ lending operations and their business models. This is true, say, of the new regulations that are to be expected under Basel IV or that are still to be fleshed out.

The implications are already dramatic – and could become more serious still. The seemingly never-ending stream of new regulation initiatives are making it difficult to plan over longer time horizons. Because of this, banks are reviewing their business models and adjusting them where necessary. The leverage ratio is forcing banks to deleverage. And as regulatory costs cause profitability to fall and limit earnings potential, higher lending rates could be the result. At the same time, regulation is likely to push funding costs up and necessitate a change to the funding mix. Moreover, the unequal regulatory treatment in favor of alternative providers in a hotly contested market undermines the banks’ competitiveness. Finally, the tighter capital requirements give rise to lending constraints, with correspondingly negative consequences for the real economy.

“Given the heavier burdens as a result of regulation, to which there is no end in sight, it is crucial to have fair regulation with a sense of proportion,” said Jens Tolck¬mitt, Chief Executive of the vdp. “The particular characteristics of business models as well as specific national features must be reflected in the details of the regulatory initiatives that are still ongoing. That is the only way to prevent objectively inappropriate interference in Pfandbrief banks’ well-functioning business models,” Tolckmitt went on. In this context, the vdp is calling, in particular, for rigorous adherence to the principle of “the same rules for the same business” to prevent an uneven playing field. “The regulatory impact on demand for the tried and tested funding instrument which is the Pfandbrief must be kept to a minimum and its privileged status safeguarded on a lasting basis,” Tolckmitt demanded.

The same applies to the forthcoming harmonization of covered bonds at the EU level. Following the consultation phase, which closed at the start of this year, and a public hearing with the aim of making a first assessment, a content-related analysis is currently underway based on the comments submitted.  Once a scientific study on the legal and economic aspects of a common covered bond regime has been evaluated, the European Commission is expected to make a decision from this fall. The vdp is unwavering in its call for minimum standards at a high level to prevent interference in successful national regimes. The Association is opposed to the creation of a separate European legal framework, referred to as the “29th regime”.

“Going forward, the vdp will continue to do its utmost to ensure that new regulatory initiatives and the forthcoming EU harmonization do not compromise either the Pfandbrief and its – objectively justified –  regulatory preferential status or the well-functioning, tried and tested business models of our member banks. In view of the positive experiences of the last few years, we are confident that we will continue to be successful in our efforts,” the vdp’s Chief Executive Jens Tolckmitt concluded.

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