pbb diversifies its business model with Strategy 2027 and aims for significantly higher profitability
- Expansion of the business model
- New asset classes in the core business, asset management and expansion of services for institutional CRE investors
- By end of 2027, around 10% of revenues are expected to come from commissions
- RoTE, as the key profitability indicator, is expected to increase significantly to 8% by the end of 2027
- Targeted CIR of below 45%; efficiency gains should more than offset investments in new business areas
- Payout ratio of at least 50% planned
Garching, 10 October 2024 – Deutsche Pfandbriefbank AG (pbb), a leading European specialist bank for commercial real estate finance, is diversifying its business model and income base to make the bank even more future-proof and profitable. Commercial real estate finance remains the backbone of pbb. The relatively high weighting of the asset class office is to be gradually reduced in the coming years, and the focus on more profitable and faster-growing segments is to be intensified.
In addition, the bank plans to consistently expand its asset management and to develop an extended service business for institutional CRE investors. The plan is for around 10% of income to be generated from commissions by end of 2027. The funds for the necessary investments shall be created by consistently implementing existing and additional measures to increase efficiency in the core business. Overall, the return on tangible equity (RoTE) as the future key performance indicator, is expected to increase significantly to around 8% by the end of 2027.
‘We have held our own well as a bank in the challenging market of the past two years. Nevertheless, we want to better equip ourselves for future cycles by broadening our business model,’ said Kay Wolf, CEO of pbb. ’We are still far from having exhausted the enormous potential of our business platform. It is therefore only logical that we increasingly make our expertise in real estate financing available to institutional investors along the value chain in the future, thereby developing additional commission-based business. In addition, we plan to further optimise our core business by focusing more strongly on promising and high-growth asset classes in new business. With these strategic decisions, we want to make the bank more resilient and significantly more profitable.’
The 2027 strategy has three core pillars:
- Strengthening the core business of commercial real estate financing by diversifying into promising asset classes and focusing on higher-growth business (henceforth the RE Finance Solutions division),
- Developing a significant commission business (henceforth the RE Investment Solutions division), and
- Increasing efficiency and adapting the current operational platform, including through the further use of technology and artificial intelligence.
‘By adjusting our business model, we want to significantly improve the earnings profile of our bank’, said Marcus Schulte, CFO of pbb. ’We plan to strengthen our profitability step by step and thus create added value for our shareholders.’
Expansion of the core business to include future-oriented asset classes
In the ‘RE Finance Solutions’ area, the financing portfolio is expected to remain largely stable in the coming years. However, the composition is expected to change significantly in order to better reflect structural market developments with high potential. These include macro trends such as the growth of e-commerce and cloud computing, the increasing demand for living space from students, and an ageing society in industrialised countries. The bank will therefore address high-growth asset classes such as data centres, serviced living and senior living. In addition, new business in the logistics, hotel and retail sectors is to be intensified, while the office and residential sectors will be given a lower weighting.
In the future, the geographic focus will be more on Europe. Here, the bank plans to expand its business even further, particularly in its Continental European markets. The US, the world's largest real estate market, remains important for the bank, albeit with a much more focused investment approach in terms of regions and clients.
With this portfolio optimisation, the business segment's contribution to earnings should continue to rise despite a largely stable volume, especially as loan loss provisions are expected to normalise at an estimated 15 to 25 basis points of the portfolio over the next few years.
Structure of a new business division for commission-based business
The new ‘RE Investment Solutions’ business division combines off-balance sheet commission-based business. This segment will have two mainstays:
On the one hand, ‘pbb invest’, the bank's asset management. Now that the market is stabilising, the bank is currently in the process of sounding investors for a debt fund; an equity product is also in the pipeline. The bank intends to go on the offensive with both products in the coming year. In addition to this organic growth, however, pbb also considers respective acquisitions and thereby plans to achieve assets under management of €4 billion to €6 billion in total by end of 2027.
Secondly, with ‘Originate & Cooperate’ the bank wants to make better use of the financing business through institutional investors, which is now also growing strongly in Europe. In the US, around half of all real estate financing is already handled by lenders that cannot be assigned to the banking sector, e.g. through loan funds. In partnerships, pbb wants to offer this rapidly growing investor base, which includes major well-known fund companies, its sourcing and structuring expertise in particular, but also products such as due diligence and loan servicing. It will thus become a service provider for these investors, expanding its share of the changing value chain for real estate, and doing so with significantly less capital employed for this business.
Overall, the ‘RE Investment Solutions‘ division is expected to generate around 10% of the bank's total earnings by end of 2027. Overall, the ‘RE Finance Solutions’ and ‘RE Investment Solutions’ divisions are expected to see a compound annual growth rate (CAGR) of 4% over this period.
More efficient
The bank plans to more than offset the investment costs for the development of the new ‘RE Investment Solutions’ business area by consistently implementing ongoing and further cost savings. The efficiency and scalability of the operational platform is expected to be further increased, among other things, by the adjustments to the new business strategy and the further increasing use of technology, including artificial intelligence. Despite further investments in new business activities, the cost-income ratio is expected to fall to below 45% by end of 2027.
The Management Board expects that the adjustments to the business model and further efficiency gains will significantly increase the profitability of the bank as a whole. A RoTE of 8% is expected for 2027, an important milestone for achieving an adequate return on capital.
Shareholders are to participate in this development through dividends and, in the future, share buybacks (the latter subject to prior ECB approval). Up to and including the financial year 2027, the bank intends to distribute at least 50% of its profit after tax (IFRS, group) and AT1 coupon to shareholders. Despite this capital distribution and the planned acquisitions in asset management, the core capital ratio (CET 1 ratio) is expected to remain above 15.5% during this period.