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Investing.com -- S&P Global Ratings has revised the outlook for Deutsche Pfandbriefbank AG (ETR:PBBG) (PBB) to stable from negative, affirming its ’BBB-/A-3’ long- and short-term issuer credit ratings. The ratings agency has also affirmed its ’BBB/A-2’ long- and short-term resolution counterparty ratings on PBB, as well as all issue ratings.
The change in outlook is due to an expected stabilization in commercial real estate (CRE) valuations and transaction volumes in the U.S. and Europe. This reduces the risk of further substantial deterioration in asset quality for PBB. The bank’s portfolio derisking, carried out in 2024, strengthens its resilience against potential market fluctuations. Key risks remain, however, in the U.S. office and German development portfolios, but these are expected to be covered by preprovision income, reducing downside risk to PBB’s credit profile.
PBB’s strong capitalization, resilient funding and liquidity profile, and robust loss absorption buffers support its credit profile. The bank’s asset quality is likely stabilized, particularly due to its derisking activities executed in 2024, which included selling performing loans to reduce concentration, reducing development loans, and substantially lowering exposure to the U.S. office portfolio.
In 2025, PBB is expected to make tangible progress on its 2027 strategy, which aims to improve business model resilience by gradually reducing concentration in its CRE book and reducing reliance on net interest income by offering real estate investment services to institutional investors. The strategy also targets assets under management of €4 billion-€6 billion in 2027 through organic growth and purchases of smaller asset management providers.
PBB continues to show strong capitalization, with an estimated S&P Global Ratings’ risk-adjusted capital ratio that increased to about 13% as of year-end 2024 from 11.8% in 2023. The bank has some excess capital available that can be used for targeted growth in the asset management space. Expected cost savings from improved digitalization and IT transformation can be invested in its growth area of real estate investment services, without significantly weakening its cost-income ratio.
Investor confidence in PBB has largely recovered, with funding spreads returning to more sustainable levels. PBB’s strategic funding mix of 50% covered bonds and 50% retail deposits and unsecured bonds is expected to ensure a stable funding profile.
In the event of a resolution, PBB’s senior preferred investors continue to benefit from high loss-absorbing capacity. The bank is expected to reduce its additional loss absorption capacity (ALAC) buffer to about 700bps of S&P Global Ratings’ risk-weighted assets by year-end 2026 due to amortizing minimum requirement for 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 preprovision earnings over the next two years. To maintain its current credit profile, PBB must uphold strong capitalization, sustainable profitability, a resilient funding profile, and sufficient loss-absorbing capacity.
S&P could lower its ratings over the next two years if CRE markets show renewed signs of stress, strategic revisions to PBB’s business model fail to increase its resilience, or a decline in investor confidence restricts PBB’s market access at reasonable spreads for a prolonged time. An upgrade is considered remote and would require PBB to materially improve its business diversification and resilience, significantly increase its fee income contribution, and significantly reduce its NPLs.
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