vdp Issuance Climate - Pfandbrief market still in downbeat mood
Berlin, 14 December 2023
- Brighter sentiment on the market for unsecured bank bonds
- Pfandbrief issues of EUR 49.5 billion planned for 2024
A slight headwind for sales of Pfandbriefe and unsecured bank bonds is expected to persist during the first half of 2024, according to the results of the survey conducted for the third time by the Association of German Pfandbrief Banks (vdp) among its members’ capital market experts.
Possible pressures for Pfandbrief business include, among other things, still subdued lending business, low demand from the ECB (ECB support), the attainable asset swap spread level and the over-subscription levels achieved. Prolonged inversion of the yield curve and a generally uncertain outlook for future interest rate trends have recently led to a strong investor preference for short and medium-term maturities. Issuance of longer-dated Pfandbriefe has rarely been possible in the past six months. At +37 points, expectations among capital market experts regarding investor demand for Pfandbriefe for the first half of 2024 are once again significantly more positive than in June 2023 (+14 points).
The results of the twice-yearly survey are published under the title “vdp Issuance Climate”. The sentiment indicator, which ranges from -100 to +100 points, continues to show slightly subdued sentiment at -22 points, with scores for Pfandbriefe (-23) and unsecured bank bonds (-21) currently reflecting very similar assessments. Compared with the June 2023 survey, Pfandbriefe scored slightly worse, while the score for unsecured bank bonds improved.
Scoring December 2023 June 2023
Score for Pfandbriefe: -23 -14
Score for unsecured bank bonds: -21 -29
Overall score: -22 -21
The vdp member institutions expect lending business to remain subdued in the coming six months (-53 points). This represents an improvement of 28 points compared with the survey conducted in summer 2023. Capital market experts are less negative with regard to the general rating trend for the banking sector than they were in June 2023 (-36 points). The corresponding score improved by twelve points to -24.
ECB expected to cut interest rates
The vast majority of institutions taking part in the survey expect two minor cuts in the key interest rate of 25 basis points each by the end of 2024, meaning a reduction in the deposit rate from the current 4% to 3.5%. Only a minority expect up to three small interest rate cuts. However, seven institutions still expect the deposit rate to rise above 4%.
Improved prospects for sales of unsecured bank bonds
The vdp member institutions expect better sales potential for unsecured bank bonds in the first half of 2024: while investor demand was rated at 0 points in June 2023, expectations for the first half of 2024 have improved to +24 points. This is probably due to the attractive yields that can be achieved and the limited supply of unsecured bank bonds.
Pfandbrief sales in 2023 exceed maturities
Pfandbriefe with a total volume of just under EUR 54 billion have been issued since the beginning of 2023. The current figure is around 30% below the volume for the whole of 2022 – mainly owing to subdued demand for property finance and corresponding cover – but nearly 10% above what vdp member institutions forecast at the start of 2023. The new issuance volume achieved to date will exceed this year's maturities by EUR 10.5 billion. Sales of Pfandbriefe in benchmark format (at least EUR 500 million) were especially buoyant this year. With 56 issues and eleven tap issues totalling EUR 37.5 billion, this year’s volume equals the amount sold in 2020 and 2021 combined.
“Higher interest rates brought real money investors back into the order books despite the inverted yield curve and uncertainty over the future interest rate trend,” said Sascha Kullig, member of the vdp’s Management Board, summing up Pfandbrief business in 2023.
New Mortgage Pfandbriefe with a volume of EUR 41.1 billion expected in 2024
The vdp member institutions expect a new issuance volume of EUR 49.5 billion in 2024, with Mortgage Pfandbriefe accounting for EUR 41.1 billion and Public Pfandbriefe for EUR 7.9 billion of this total. At the same time, Pfandbriefe with a volume of EUR 45.0 billion will mature in the coming year. Based on these estimates, the volume of German Pfandbriefe in circulation will record net growth of EUR 4.5 billion in 2024. While a net increase of EUR 9.2 billion is expected for Mortgage Pfandbriefe, the volume of outstanding Public Pfandbriefe is likely to fall by EUR 4.7 billion. Member institutions are planning to place Green Pfandbriefe totalling EUR 5.3 billion and Social Pfandbriefe worth EUR 1.1 billion in 2024. The volume of these sustainable Pfandbriefe in circulation at the end of November 2023 amounted to EUR 24.0 billion, with thirteen institutions having placed such bonds on the market to date.
“The survey results reflect ongoing challenges on the capital and property markets, but at the same time give cause for optimism in 2024. Solid financial results and good capitalisation of our member institutions are just two reasons why Pfandbrief banks are likely to achieve successful placements of unsecured bank bonds and Pfandbriefe next year, despite ongoing difficulties," says Kullig.
Each survey comprises an assessment of the past six months, the current situation and the coming six months, with the latter being weighted most heavily in the evaluation. These assessments determine separate scores for Pfandbriefe and unsecured bank bonds, as well as an overall score. A score of 0 points corresponds to a stable capital market environment in which issuance plans can be carried out without any problems. Negative scores (maximum -100) indicate that the issuance environment is less favourable than average, and positive scores (maximum +100) that it is more favourable than average.
The vdp Issuance Climate survey provides information twice a year on the sentiment among the members of the Association of German Pfandbrief Banks (vdp) with regard to the placement of Pfandbriefe and unsecured bank bonds. To assess this sentiment, experts from the vdp member banks are asked about the factors influencing Pfandbrief and unsecured bank bond sales. Each survey covers the past six months, the current situation and the coming six months, with the latter being weighted most heavily in the evaluation.
The responses are grouped together by subject area, providing an overview of the supply and demand situation on the markets for Pfandbriefe and unsecured bank bonds. Three scores are then calculated based on certain assumptions about the relative importance of each subject area: one score each for Pfandbriefe and unsecured bonds, as well as an overall score. A score of 0 points corresponds to a stable capital market environment in which issuance plans can be carried out without any problems. Negative scores indicate that the issuance environment is less favourable than average, and positive scores that it is more favourable than average.
The Pfandbrief banks belonging to the vdp hold a market share of almost 96% of outstanding Pfandbriefe.