Pfandbrief issuers’ expectations for the next six months are more subdued than they were at the turn of the year, according to a vdp Issuance Climate survey, which found the association’s members’ needs to be declining, and with investor demand and funding conditions expected to soften.

The Association of German Pfandbrief Banks (vdp) began publishing the results of the member survey in December to assess capital market sentiment. The latest survey, released today (Tuesday), was conducted at the end of May and is based on responses from 37 vdp members.

Issuers are asked their expectations (reflected in a score of between minus 100 and plus 100) on nine topics – ranging from oversubscription levels to lending business refinancing needs – over the next six months, as well as current market conditions, and investor demand during the preceding six months. The outlook is given a stronger weighting in aggregate scores than current and past experience.

The aggregate score for Pfandbriefe was minus 14 in today’s publication, down from minus 10 in December. Issuers are also asked several of the same questions in respect of unsecured bank bonds, and this measure also declined, to minus 29 from minus 26. The overall score, combining secured and unsecured debt, fell to minus 21 from minus 17.

Among Pfandbrief questions relating to market conditions, the biggest deterioration was in expectations regarding investor demand: the score for investor demand over the next 6 months fell from plus 20 to plus 14. However, the fall in expectations was not only from a high level six months ago, but also in conjunction with a score of plus 30 for investor demand at present and plus 27 for the past six months – numbers that are both higher than were anticipated based on December’s survey.

The survey responses reflect the widening of covered bond spreads this year, with the score for the asset swap spread level at present having fallen from minus 6 to minus 22, while expectations for the next six months have fallen from minus 16 to minus 19. However, the score for expectations regarding the impact of ECB support, although very negative, was less negative, rising from minus 60 to minus 56.

Relative value of Pfandbriefe versus government bonds is expected to remain supportive, with the score in respect of the premium to Bunds over the next six months having risen from 28 to 44, and the respective score based on current conditions having remained flat at 56.

“As a stable funding instrument, the Pfandbrief always sells – even in tense market periods such as we are experiencing now,” said Sascha Kullig, member of the vdp management board. “There have been a lot of issuances in 2023 thus far, but we cannot assume that this momentum will continue in the second half of the year.

“This would require a revival of the real estate financing business.”

However, the score in respect of lending business to be refinanced fell from an already strongly negative minus 69 to minus 81. Real estate financing by vdp member banks in the first quarter of 2023 was 48% lower than a record set a year earlier, and the association noted that 80% of member banks surveyed assume that the low lending activity will have a negative effect on demand for funding.

“The new business activity has been extremely low over recent months,” Kullig (pictured) told The CBR, “and Pfandbrief institutions do not expect it to be more dynamic in the second half of the year. And if there’s low new business activity, there’s for sure lower needs for new funding.

“On top of that, we also have much lower maturities in the second half of the year.”

The survey recorded a minus 12 score for upcoming Pfandbrief maturities, down from plus 3 in December, in parallel with a 34% decrease in maturities of mortgage Pfandbriefe in the second half relative to the first half of the year.

As of 12 June, €24.5bn of benchmark Pfandbriefe had been issued this year, surpassing record issuance in the corresponding period last year by 25%. Total Pfandbrief issuance was €27.5bn to the end of May, of which €22.2bn was mortgage and €5.2bn public.

The modest scores in respect of Pfandbriefe were nevertheless higher than for unsecured bonds, where expectations regarding investor demand and asset swap levels deteriorated and were lower than for Pfandbriefe. The score in respect of asset swap levels for the coming six months was minus 61 – marginally higher than minus 65 currently.

Expectations regarding the rating trend in the banking sector and any impact on capital markets fell from minus 30 in December to minus 36 in the latest survey. However, Kullig sees potential for improvement in unsecured conditions.

“Placement of unsecured bank bonds has proved predominantly difficult so far this year,” he said. “But there may be more issuance opportunities in this segment in the second half of the year than at the beginning, given that our members have weathered the uncertainty triggered by crises at some US regional banks and Credit Suisse, and that unsecured bank bond spreads are currently narrowing.”

Indeed, investor demand for unsecured bonds over the next six months came in at zero, an improvement on minus 9bp for the last six months. Furthermore, current unsecured bank bond oversubscription levels recorded a score of zero in the latest survey, better than a December score of minus 17 in respect of prevailing conditions and 12 regarding expectations for the first half of the year. However, the oversubscription score for the coming six months was minus 19.