22 Feb, 2024
Vanguard is top investor in CRE-exposed Deutsche Pfandbriefbank
By Adrian Jimenea and Cheska Lozano
US investment manager Vanguard Group Inc. increased its stake in Deutsche Pfandbriefbank AG last year, at a time when concerns were mounting about the lender's exposure to US commercial real estate (CRE).
Vanguard held a 3.4% passive stake in the bank at the end of 2023, up from 3.34% a year prior. It is the top investor in Deutsche Pfandbriefbank with an $18.7 million holding, according to S&P Global Market Intelligence data. Vanguard is one of the world's largest providers of exchange-traded funds.
Deutsche Pfandbriefbank faces asset quality pressure due to its significant exposure to the CRE sector, especially in the US, according to S&P Global Ratings. The German lender was the most-shorted European bank as of Feb. 19.
Vanguard does not comment on specific holdings, a spokesperson said. A Deutsche Pfandbriefbank representative said the lender does not comment on investors or potential investors.
Rising risks
Around 15% of the bank's CRE portfolio is in the US, and as of Sept. 30, 2023, 80% of that total was in offices, according to its latest earnings presentation. CRE market conditions are likely to remain difficult in 2024 in both the US and the bank's domestic market of Germany, where it is also active.
The bank had reassured investors of its liquidity position in early February after disclosing that it would take risk provisions of between €210 million and €215 million amid "the biggest real estate downturn since the global financial crisis."
Ratings cut Deutsche Pfandbriefbank's ratings on Feb. 14, citing pressure on asset quality due to material structural changes in CRE, especially in the office and retail segments. The agency's outlook on the bank is negative, reflecting weakened investor confidence in its monoline business model and predominantly wholesale funding structure.
The bank's nonperforming loan ratio increased over the first nine months of 2023, reaching 3.42% as of Sept. 30. Ratings expects that the NPL ratio had climbed to 3.9% at the end of 2023.
Looking forward
The outlook is unlikely to improve any time soon, and US office attendance levels continue to lag. Office vacancy rates in New York, where 63% of the bank's US real estate portfolio is located, are likely to grow, ABN Amro analysts said in a report.
Still, the bank holds enough capital to deal with most scenarios, analysts say. An analysis by Dutch bank ABN Amro showed that, even in a difficult scenario where the asset recovery value in US office loans was only 20%, Deutsche Pfandbriefbank's capital ratios would remain "well above" minimum requirements.
Ratings also maintained that the bank's robust capital would help mitigate its concentration in CRE. Its base case is that Deutsche Pfandbriefbank will remain moderately profitable, with 2024 earnings strengthening moderately from 2023.
In January, Deutsche Pfandbriefbank reported a preliminary 2023 pretax profit of €90 million, meeting the lower end of its previously downgraded target range of €90 million to €110 million.
