Deutsche Pfandbriefbank (ISIN DE0008019001) update

In July last year I introduced Pfandbriefbank as a “forced IPO” special situation. That’s what I wrote at the end of the post:

As I have said in the beginning, PBB is a simple case: I do think that the “forced IPO” of PBB from the German Government has created a typical special situation with good upside potential. This is clearly no “shooting out the lights” grand slam home run. In golf terms I would say that this is a “solid 6 or 7 iron” shot.

Looking at the perfomance of the stock since then, it looks like in Golf language that my “solid 6 or 7 iron” nevertheless “landed in the rough” with the stock being down -23% vs. -9% in the CDAX.

2-yas-links-what-do-you-do-when-your-ball-is-stuck-in-the-rough-at-the-yas-links-golf-course-at-abu-dhabi1

To add insult to injury, even Aareal Bank performed better with -17%, but Commerzbank (-29%) and Deutsche Bank (-48%) did worse. Overall the EuroStoxx banking subindex made -33% in the same period.

pbb comp

Already some days ago, Pfandbriefbank finally issued their 2015 annual report.

Including a positive tax impact, PBB recorded EPS of 1,71 EUR for 2015. Comprehensive Incomce, which in my opinion is even more important for banks was slightly better at 1,74 EUR per share. That results in a book equity of 20,42 EUR/share.

If we look at my investment case from back then, we can see that this is actually slightly better than I assumed (19,84 EUR).

On the other hand, they “lowballed” on 2016 earnings (“slightly below 190 mn EBIT”) which is below my initial case.

Those were my major other observations from reading the material:

  • target dividend payout ratios are 40%-50%
  • -73 mn HETA write down included in 2015, but also 50 mn gain on sale
  • Problem ratio declined, reserve coverage increased
  • 2016 EBT “slightly less than 2015” so lets assume 190 mn EUR PBT or around 133 mn EAT
  • Write-up of Heta only “step by step”, it seems they want to keep this as “piggy bank” to maybe compensate future problems
  • further margin contraction for new business expected
  • Pfandbrief issuance not so easy because of low yields (more spread required), although 500 mn EUR, 19 year Pfandbrief was recently issues at MS +25 bps
  • Several times it was mentioned that RWA might increase due to regulation changes

Overall I would say that they seem to “lowball” at the moment, but that in principle the business does ok. Not great but OK.

Based on the guidance, I have updated my simplistic model (without dividends) to see how the case looks now:

With the lower expected ROE, clearly the fair P/B multiple is lower too. I assume that the “fair” P/B multiple is now 0,75 instead of 0,9.

The target prices are now clearly lower than before but also the price has dropped accordingly, so the overall case looks (based on todays prices) still attractive.

That poses now an interesting question: My projections were maybe too optimistic. However the price dropped so much, that from today’s price, the case still looks attractive. So should I sell the stocks because the fundamentals look worse or shoul dI buy more because at the current price the stockk looks attractive ?

Are my current assumption again too optimistic ? I don’t think so, but clearly no one knows for sure. I do think that they have now enough reserves to show the assumed profits for the next 2-3 year at least.

Managment incentives

PBB’s mangement in 2015 still had fixed contracts, as they were owned by the government until the IPO: This is what they mention in the annual report (page 99):

Pursuant to section 10(2a) of the German Financial Markets Stabilisation Fund Act (Finanzmarktstabilisierungsfondsgesetz – «FMStFG»), until its privatisation in July 2015, pbb Group was prohibited from paying variable remuneration to the members of its Management Board, and its employees.Moreover, fixed salaries were limited to a maximum of € 500,000 per annum.

From 2016 on however, there will be bonuses:

Based on an analysis of requirements for such adjustments (which was already
carried out the year before), in 2015 pbb Group redesigned the remuneration systems for the Group in its current situation, in an appropriate manner that is in line with the law and prevailing market conditions, also introducing variable remuneration. This adjusted remuneration system was implemented with effect from the year 2016.

I guess that management didn’t have a large incentive to “talk up the stock” for now or show an aggressive write up of the Heta position, maybe this changes if they can now earn bonuses. At least, sharte price performance seems to play a role in determining the future bonus:

Variable remuneration is paid in cash. No share-based remuneration system is in place, although the amount of variable remuneration is determined by the development of the pbb share price, aspart of the sustainability component.

However no more details were provided.

Where are the activists ?

From a shareholder perspective, a quicker release of the HETA reserves and extra dividends clearly would be value enhancing (you get 1 your in cash instead of 0,44 P/B multiple), but it doesn’t look that management is highly motivated to do so for the time being. In my opinion, this could be a great case for an activist, especially when the Government most likely  sells its 20% stake in 2017.

Not only could an activist push for more dividends but also for a merger with Aareal which would be the natural fit as I wrote in the first post last year. It will be interesting to see if someone dares to go activist on a bank, but looking at the valuation it could be worth the effort.

Summary:

Overall, despite the stock price drop since I bought it; I do think that PBB has still an attractive risk/return relationship as a special situation. Therefore, as I have already commented in the old post, I increased the position by 1% at 8,90 EUR per share.

 

 

 

18 comments

  • Is there anything to be worried about the Deutsche Bank panic if you invest in Pfandbriefbank?
    DB is in free fall lately, while PBB stock price hardly reacted to the latest round of DB panic.

    Is there any plausible case for DB in which case there would be real repercussions (other than panic) for PBB also?

    If the answer is no, then I guess you guys would increase your position in PBB should it drop a lot?
    Currently I have no position in any bank, but plan to add PBB.

  • pumba19741113

    Did you listen to the q1 conf call? How do you evaluate the prospect of entwring the US commercial real estate market?

  • outlook 2016
    in the FYnumbers they speak about ROE 6,2% for 2016E
    this is 170M after tax and 202M before tax
    if I dont make a mind error this should lead to some much beeter numbers for PPB in the futue
    based on ROE 8% for FY2019 I see €24,04 bookvalue and extra €2,63 divieden payout

  • Thanks for the analysis. I wonder if the remaining government stake could be bought by PBB themselves. That would be similar to NN Group who also bought the stake from their former parent, at least partly. From a cash and CET1 perspective this should be doable for PBB. Plus there is a Tier 1 bond callable in 2017 which should save them EUR 21 mn annually going forward if they pay back the bond.

    • Interest on the T1 bond XS0303478118 drops to around 2% in 2017. It will then still be subordinated and the coupon not to be paid when making losses. So there is 7m per year to save on this 350m issue and they might want not to call, if they need it in their capital structure. Subordinated Aareal DE000A1TNC94 offers 3.8% YTM in comparison.

  • How do you get to the implied a.t. number? What makes you think p/b of 0.9 is more appropriate than the 0.75x? thanks

    • It’s the other way round: I think the 0,75 ratio is more appropriate than the 0,9 I used before. Lower ROE –> lower multiple-

      • you shoudl update your sheet
        the 2015 numbers are not correct
        equity is 2746 book 20,42

        outlook 2016 is eps 1,12 (151M)
        upside heta is possible writeup

        buyback is not in the cards now because they want to be prepared for basel IV
        instead of paying dividend they should use the money to buyback shares to virtual tripple the shareholder value

        dividend 75%
        buyback 233%
        value = 3,11

        bookvalue growth of pbb is weak because they dont buyback and payout 50% eps in dividend

        but dividend yield 2016e is nice 7%

        • I guess you have not actually read my post. I mentioned that the book value per share is 20,42. The table you are referring to explicitly shows my old assumptions/estimates in the first few lines.

  • big player are selling big time at €9 range
    when its over i expect a fast jump to €10

  • Hi,
    I also have uploded at 8 and 9. The bank is overcapitalized by any measure. The activist investor is a great question. I am surprised no fund sees here a chance. I think it is also declined in line with banks. As low rate makes it hard for banks to make money on interest margin. But I think low rates are rather positive for PBB as it maintains the steady flow of new financings that replaces the old book.
    I think Q1 will be not so great as the bank levy will be payed and showed there. With 40%P/BV and reasonably steady and simple business model this is still a great value.

  • As I mentioned, PBB guided that they will write up Heta slowly.

    Why do you assume 16% Tax ?

  • I loaded up PBB big time at €8,68avg sadly I started too early to buy so I went 9,3 -> 9,1 -> 8,70 -> 8,00 -> 8,30 -> 8,70

    2016E is slight unter 190M so I guess 180M reduced 16% tax its 151M

    so EPS 2016E will be 1,12
    Dividend about 0,55

    Heta assets have the chance to writeup till 100% so its possible that earnings will improve up 100% for 2016

    tax rate for pbb is fixed at 16% for the next 20 years

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