Pfandbrief banks hold their own in difficult market setting

Berlin, 29 April 2021


  • Real estate loan portfolio grows by 4.5% to EUR 904 billion
  • Pfandbrief banks increase issue volume to EUR 59.8 billion
  • Call for appropriate output floor implementation in Basel III reform

The member institutions of the Association of Pfandbrief Banks (vdp) are proving themselves to be robust in the face of the COVID-19 pandemic. Their real estate financing activity remained at a high level in 2020, and they increased their loan portfolio markedly. In addition, their Pfandbrief issue volume was considerably higher than one year before.

“Thanks to their prudent business policy, the Pfandbrief banks have weathered the COVID-19 crisis well so far. This is demonstrated by the fact that lending levels remain high, the loan portfolio has grown, and deferral figures are low,” Dr Louis Hagen, President of the vdp, emphasized at the Association’s annual press conference held today. “The banks have stepped up their global risk provisioning – in some cases, considerably – to be prepared for any contingencies. Moreover, the Pfandbrief banks continue to report comfortable equity ratios. This puts them in a good position to cope well with the effects of the pandemic going forward and enables them to remain, as in the past, reliable partners for their customers.”


Development of Pfandbrief business in 2020

In COVID-19 pandemic, Pfandbrief spreads quickly return to pre-crisis levels

Once again, the Pfandbrief has proven it is not only an important anchor of stability in turbulent times but also a reliable and competitive source of funding for its issuers.

“The Pfandbrief has performed appreciably better during the COVID-19 crisis than other covered bonds. Spreads widened only moderately at the beginning of the pandemic and have been back at pre-crisis levels for some time now,” Dr Hagen pointed out. “That said, strong investor demand is also to be seen beyond the central banks.”

As with earlier crises, the Pfandbrief market has been fully functional during the pandemic, too. Issuers are able to procure long-term liquidity through the Pfandbrief at any time.

In 2020 Pfandbriefe were issued with a volume of EUR 59.8 billion, representing an increase of 8.7% compared with the previous year (2019: EUR 55.0 billion). Of this total, somewhat more than half (around EUR 31 billion) of the issued Pfandbriefe were retained in order, for example, to be deposited with the Bundesbank as collateral.

With new issues totaling EUR 40.7 billion in 2020 (2019: EUR 43.8 billion), Mortgage Pfandbriefe were again the most important Pfandbrief category by far. At EUR 19.1 billion (2019: EUR 11.2 billion), Public Pfandbriefe experienced the largest issue volume since 2011.

The volume of Pfandbriefe outstanding increased in 2020 to EUR 371.9 billion (2019: EUR 364.1 billion). While the volume of Mortgage Pfandbriefe outstanding rose once again, from EUR 242.3 billion in 2019 to EUR 248.5 billion, that of Public Pfandbriefe went up for the first time in 20 years, from EUR 121.8 billion to EUR 123.4 billion.

Development of real estate financing business in 2020

Level of Pfandbrief banks’ real estate financing consistently high

Even in the COVID-19 crisis year 2020, the Pfandbrief banks again demonstrated to their customers that they were reliable financing partners. As at end-2020 their real estate loan portfolio was up by 4.5% to EUR 904.0 billion (2019: EUR 865.0 billion). Real estate loan commitments dropped somewhat last year, by 3.6%, amounting to EUR 162.3 billion (2019: EUR 168.4 billion). In this respect, residential properties as an asset class were again in high demand, with loan commitments rising by 8.1% to EUR 108.3 billion (2019: EUR 100.2 billion). By contrast, commercial properties and thus also the financing of same show a more immediate response to crises. So it has been in the pandemic. On the one hand, a great many projects have been postponed due to the uncertainty that surrounds future economic developments. On the other hand, the Pfandbrief banks have been as prudent and as risk-oriented as usual. In consequence, they granted 20.8% less by way of commercial property loans (EUR 54.0 billion) than in 2019 (EUR 68.2 billion). Nevertheless, by the end of 2020 there were palpable signs of a revival.

“In the fourth quarter of 2020 the volume of commercial property lending rose to EUR 16.0 billion, thus returning to the quarterly average seen for the quarters of the last three years,” Dr Hagen pointed out. “An economic recovery can be expected to lead to further growth in financing volumes. Then, both user demand and the construction of new commercial properties will pick up again.”

The loan deferrals granted remained at a low level throughout 2020. As at end-June they stood at 2.1% (residential properties/private customers) and 2.2% (commercial properties) of the real estate loan portfolio, decreasing to 1.2% (residential properties/private customers) and 1.1% (commercial properties) of the loan portfolio as at December 31, 2020.

Real estate prices up further

The COVID-19 crisis did not have the effect, last year, of reversing the trend in real estate prices. Indeed, the vdp property price index climbed to a new high of 172.8 points (+6.0%) at the end of 2020. With that, property price growth in the 2020 pandemic year was almost on a par with that of 2019, when prices advanced by 6.3%. Prices for residential properties were 7.5% higher at the end of last year than one year before. Commercial property prices edged up marginally, by 0.6%.

“The gap between the development of prices for residential and for commercial properties widened yet again in 2020. Yet also the commercial property markets as a whole have proven to be surprisingly robust during the pandemic so far,” Dr Hagen commented.

Despite the ongoing uncertainties, the vdp expects the upward movement in property prices to continue in individual asset classes during 2021, though not necessarily at the growth rate seen to date.

Current regulatory issues

Basel III:

EBA impact study shows massive capital burden for German banks

The Pfandbrief banks are in favour of the completion of the Basel III reform and support implementation in Europe according to the Basel resolutions. However, the approach the European Banking Authority (EBA) is advocating goes far beyond what circumstances actually justify, the vdp stressed with reference to the EBA’s most recent impact study, “Basel III Reforms: Updated Impact Study”. “Maximum implementation, the approach favoured by the EBA, will place an excessive burden on credit institutions and, above all, on low-risk business,” vdp Chief Executive Jens Tolckmitt warned. He added: “Gold-plating the Basel requirements in Europe without any need whatsoever would lead to undesirable side-effects and damage financial stability.”

Under the approach that the EBA recommends for implementing the Basel III reform, the capital to be held by credit institutions across Europe would go up by at least 19% on average, while European real estate finance providers would have to shoulder an increase of 23%. For German banks, this gold-plating of the Basel requirements would result in an even sharper rise in the minimum capital they must hold, namely by 35% on average.

“The increase in capital requirements to be expected is massive and misses by far the objective that the supervisory authorities set themselves; moreover, the EBA’s figures do not even take into account any burdens as a result of the COVID-19 crisis,” Tolckmitt pointed out.

vdp endorses parallel stacks approach

The vdp’s criticism is focused mainly on the planned implementation of the output floor, which would lead to massive additional burdens in particular for German banks and European real estate finance providers. One possibility to mitigate the threat of increased capital requirements would be to apply what is known as the parallel stacks approach, a proposal which has garnered the support not only of the vdp but also of a growing number of EU Member States as well as large sections of the European banking industry.

Amendment of the Pfandbrief Act:

Harmonization of covered bonds bears the hallmark of the Pfandbrief Act

On April 15, 2021, the German Bundestag (Lower House) passed the German CBD Implementation Act (CBDUmsG). This legislative package, which above all drives forward the implementation of the European Covered Bond Directive and therefore the European harmonization of covered bonds, also envisages an extensive amendment of the Pfandbrief Act (PfandBG), on which the regulations at the European level are closely modeled. The amendment will ensure that German Pfandbriefe continue to enjoy EU privileges.

The vdp explicitly welcomes the CBD Implementation Act, as it closely follows European requirements and contains important improvements and clarifications.

“Besides bringing German law into line with EU legislation, the Pfandbrief Act amendment sets forth important rules on building insurance in particular as well as on maturity extension, which the vdp has advocated for some considerable time,” Tolckmitt explained.

Adoption of the legislative package on the home stretch

National legislators now have until July of this year to anchor the European regulations in national law. The second reading in the German Bundesrat (Upper House) is scheduled for May 7, 2021. This means that Germany is set to be the first EU Member State to conclude the relevant parliamentary process.

Sustainable finance:

Minimum standards for Green and Social Pfandbriefe provide market with tailwind

The share of sustainable Pfandbriefe in the total portfolio of Pfandbriefe outstanding has been on the rise for years and at the end of March of this year stood at around EUR 8.0 billion. These products are becoming an increasingly important part of the Pfandbrief banks’ funding mix.

After the vdp member banks adopted minimum standards for Green Pfandbriefe back in 2019, they recently formulated corresponding criteria for Social Pfandbriefe.

“Our minimum standards make the Pfandbrief market more attractive and provide important guidance to issuers and investors,” Tolckmitt commented.

vdp criticizes scarcely implementable criteria of EU taxonomy

As part of its Action Plan on Financing Sustainable Growth, the European Commission creates, with the relevant taxonomy, a unified classification system with which it seeks to increase the transparency of sustainable financial products. The aim of the technical evaluation criteria defined in the taxonomy is to ensure that taxonomy-compliant economic activities can be more readily identified in future.

The recently published delegated act also contains technical evaluation criteria for buildings, making a major contribution towards achieving the two climate objectives, i.e. climate change mitigation and climate change adaptation. The vdp is especially critical of the so-called “do no significant harm” criteria, which must be met in order that none of the other environmental objectives are negatively affected.

“We are pushing for practice-oriented criteria which take into account, in particular, the ongoing lack of data availability,”

Tolckmitt remarked, and proposed a central registration office for energy certificates in Germany. Moreover, the vdp is calling for uniform definitions and criteria at the European level, for example with regard to the form that the energy certificates should take.

vdp membership development

vdp welcomes new member banks

The vdp currently has 49 members. Together, they represent a market share of just under 97% of total Pfandbriefe outstanding. The most recent new members are Liga Bank and BBBank. An overview of all vdp member institutions is available here.