vdp expects stable Pfandbrief market development in 2012

  • Importance of Mortgage Pfandbrief grows
  • vdp President Jan Bettink: Pfandbrief Banks remain reliable financing partners for their customers
  • Rising number of vdp members and issuers testifies to attractiveness of the Pfandbrief in a persistently challenging market setting
  • Regarding the Pfandbrief, vdp makes a positive interim assessment of important regulatory projects, yet still sees challenges



Given that the situation on the financial markets calmed appreciably and developments on major property markets remain robust on the whole, the German Pfandbrief Banks are guardedly optimistic about the future. “The European sovereign debt crisis is not over yet, as the recent development has made clear. However, the measures taken by the European Central Bank in these past months have had a stabilizing effect. It remains a matter of urgency for policymakers to resolutely press ahead with the task of consolidating public finances.” said Jan Bettink, President of the Association of German Pfandbrief Banks (vdp), at the annual press conference in Frankfurt am Main. “In spite of the continuing uncertainties and the persistent volatility we expect our members, as things stand today, to be able to fund themselves at appropriate conditions in the current year, and capitalize on the attractive business opportunities that present themselves on the national and selected international property markets,” Bettink continued.

The vdp is confident on the whole where property finance business is concerned. In particular, this applies to the domestic market. This confidence is based on the persistently good economic situation in Germany, historically low interest rates, a strong demand from clients outside of Germany and investors’ growing asset orientation. By contrast, the foreign commercial property markets present a mixed picture. The sovereign debt crisis is having an increasingly strong impact, not least, on the property markets in southern Europe, whereas in numerous other regions such as the USA, the United Kingdom and France, there will be high-margin and, at the same time, low-risk new commitment activity again in the current year. “As important property markets are in good shape on the whole – notably the markets in Germany – we expect property finance to continue to present interesting business openings. However, customers must prepare themselves for stricter creditworthiness requirements such as larger equity shares, higher ratios of pre-let floor space prior to completion and lower loan-to-value ratios. In addition, more stringent regulatory requirements mean that banks will have to demand higher lending rates,” the vdp’s President warned.

Property finance drives Pfandbrief Banks’ new commitment activity

Last year, the Pfandbrief Banks issued new property finance commitments totaling €89.8 billion; this was 6.1% higher than in 2010. New commitment activity was roughly evenly distributed between residential and commercial real estate. Whereas in the case of residential properties, once again almost only properties located in Germany were financed, Pfandbrief Banks granted almost half of their new total lendings in commercial property finance cross-border. The United Kingdom, France and the USA were by far the most important markets.

The situation in public-sector lending was completely different, with the consolidation trend that has been observed for years continuing. The waning attractiveness of this business field for many banks is the result, on the one hand, of regulatory changes. The possible introduction of a leverage ratio under the new Basel III regime as a mandatory non-risk based ratio affects the high-volume, low-margin public-sector lending business in particular. On the other hand, it reflects the shift in banks’ understanding of risk seen of late in the wake of the restructuring of Greek debt. Against this background, new loan commitments to the public sector fell from €44.2 billion to €29.5 billion in 2011. At 78%, German borrowers again accounted for the lion’s share of new commitments given.

“New commitment activity, which proved to be robust on the whole, showed yet again that the Pfandbrief Banks remain reliable financing partners for their customers,” Bettink pointed out. “Public-sector lending also remains an important mainstay for Pfandbrief Banks. However, in this business field we note a return to classical, smaller-volume public-sector lending – under changed circumstances. In future, lenders will differentiate more strongly than in the past according to the risk-taking capacity of public-sector borrowers,” the vdp’s President stated.

Robust Pfandbrief market mirrors development in lending

Developments in the primary market for Pfandbriefe corresponded with the Pfandbrief Banks’ lending operations. In 2011, despite turbulence in the capital markets for much of the year due to the Eurozone debt crisis, gross sales of Mortgage Pfandbriefe came to €40.9 billion. This was only slightly below the level recorded in 2010 (€42.2 billion). The volume of Mortgage Pfandbriefe outstanding rose by €3.7 billion compared with the previous year to around €224 billion. “The Mortgage Pfandbrief is as popular as ever with investors and issuers, and succeeded in strengthening its market position in a difficult capital market environment,” Bettink emphasized.

Whereas the Mortgage Pfandbrief gained further in importance as a result, Public Pfandbriefe – in keeping with public-sector lending – consolidated further. Gross issuance of €31 billion was 25.5% below the previous year’s result (€41.6 billion). The drop in Public Pfandbrief sales was especially pronounced in the second half of the year. This was attributable to uncertainty and market disruption as the loss of investor confidence in public-sector debtors intensified. The large number of maturities caused the volume of Public Pfandbriefe outstanding to decrease by 13.7% to €356 billion. Ship Pfandbriefe were placed with a volume of around €1 billion; at the end of 2011, the volume outstanding came to €6.6 billion.

In total, therefore, aggregate sales of Pfandbriefe amounted to €72.8 billion, which was 16.3% down on 2010. Taking redemptions into consideration, the volume of Pfandbriefe outstanding in 2011 declined by 8.4% to €586 billion (2010: €640 billion). The decrease in market volume slowed down compared with the previous year, however – a development that is likely to continue in the years ahead as Public Pfandbrief sales gradually bottom out. “On the whole, 2011 was a good year for the Pfandbrief considering the adverse conditions, particularly in the second half-year. In light of the difficult market setting, we can be satisfied with last year’s Pfandbrief sales. The Pfandbrief has defied the euro crisis and further cemented its status as the benchmark for all covered bonds. This is also true with regard to the yield spreads. In contrast to other refinancing instruments it was possible with the Pfandbrief, also in 2011, to mobilize investors’ funds at any time and at favorable conditions. This is what makes the Pfandbrief attractive, particularly in unsettled times, and explains its growing appeal,” Bettink concluded.

Growing number of issuers and vdp member banks

The growing attractiveness of the Pfandbrief is also reflected in the number of banks that belong to the vdp, its membership having doubled since July 2005. Four new members joined last year, including Landesbank Berlin and ING Diba; the latter was one of the banks to make its debut on the Pfandbrief primary market in 2011. The Association has been able to welcome two new members already in the current year. Besides the German branch of the French bank NATIXIS, Germany’s biggest bank, Deutsche Bank, joined the vdp on February 1. “We continue to experience great interest in the Pfandbrief from domestic and foreign institutions, and expect more banks to seek a Pfandbrief license,” remarked vdp’s Chief Executive Jens Tolckmitt.

Stable issue volume expected for 2012 – gains for the Mortgage Pfandbrief

Pfandbrief sales in the current year are likely to match the same sound level as in 2011. Following a survey among its members, the vdp expects gross sales to stabilize at the previous year’s level of €72 billion. This total volume will be distributed as follows: €44 billion (+ €1.8 billion) for Mortgage Pfandbriefe, €26 billion (- €5 billion) for Public Pfandbriefe and just under €2 billion (+ €0.9 billion) for Ship Pfandbriefe. Moreover, the inaugural Aircraft Pfandbrief issue is expected in 2012. According to the vdp’s forecast, the pace in the decline of volume outstanding will slow down further. The Association is expecting a level of €561 billion at the end of this year. “The Pfandbrief is a strong and reliable pillar of Pfandbrief Banks’ refinancing activities. The vdp will do its utmost to make sure it remains just that,” the vdp’s President Jan Bettink commented.

Safeguard the Pfandbrief’s attractiveness – increase quality leadership

In order to strengthen the Pfandbrief’s lead as the quality benchmark in the covered bond market, and to ensure it stays attractive for issuers and investors, the Association believes that further efforts will be needed in response to the changing setting.

With its secondary market transparency initiative, the vdp last year led the way towards a pronounced enhancement of transparency by calculating and publishing average spread data of Jumbo Pfandbriefe with a residual maturity of at least two years. Provided at the request of investors, this service was launched at the beginning of 2012; the relevant data are published every trading day on the vdp’s website. This “one-stop” information has met with considerable interest also beyond the circle of investors, and the Association plans to refine and expand upon it during the course of this year. Coinciding with the daily publication of these spread data, new Minimum Standards for Jumbo Pfandbriefe, which the vdp had agreed on with leading syndicate banks, also came into effect.

Further measures are currently being prepared for the sector’s self-regulation. For instance, with a view to further improving the quality of the Pfandbrief, the Association is working on a system for differentiating the quality of Public Pfandbriefe as cover assets.

Moreover, preliminary work has begun on the next amendment of the Pfandbrief Act, which is expected to enter into force at the beginning of 2013. In addition to a number of technical changes, the vdp is proposing, above all, further broadening the publication duties pursuant to section 28 of the Act. In future, interest rate and currency risks inherent in the cover pools, the weighted average seasoning of loan receivables included in cover and the volumes of ECB-eligible cover assets are also to be disclosed. This, in the Association’s view, would take investors’ demand for more information adequately into account.

At the European and international level the vdp‘s work this year, too, is primarily focused on its involvement in the various envisaged regulatory projects for the financial sector. “We have already achieved a great deal for the Pfandbrief in the discussions held to date. Thus, there is likely to be preferential treatment for the Pfandbrief under the European CRD IV directive with regard both to capital backing and to the liquidity rules. This would largely take the quality of the Pfandbrief into consideration. The same applies to the treatment of the Pfandbrief under the new set of rules for insurers, Solvency II. In this way, the insurance sector is likely to remain an anchor investor in Pfandbriefe,” said Tolckmitt.

However, in the Pfandbrief Banks’ view, challenges remain in the onward process of transposing the respective projects into law. The most problematic point in this context remains the possible introduction of a binding leverage ratio. Imposing a limit on Pfandbrief Banks’ business volume irrespective of the riskiness aspect would put considerable pressure on the traditional business of public-sector lending. Within the scope of Solvency II, Tolckmitt continued, unsecured refinancing – which is a matter of importance to Banks – would face massive obstruction from, in some cases, prohibitively high capital requirements. Solvency II will also establish incentives for insurers to extend mortgage loans. “For reasons of competition, the same business should have to follow the same set of rules,” said Tolckmitt. This was especially true for the minimum standards for the lending business set by the supervising authorities.

“In the months ahead we will continue to press for the future regulation of the financial sector to take adequate account of the characteristics specific to the Pfandbrief and of the Pfandbrief Banks. The vdp is confident it will succeed,” said Tolckmitt emphatically.

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