German issuers are optimistic that demand for Pfandbriefe will improve in the coming months, albeit at elevated spreads, according to the third vdp Issuance Climate survey, while member banks expect to issue some €36bn of euro benchmarks in 2024 – more than forecast elsewhere.

In the June survey by the Association of German Pfandbrief Banks (vdp), its members had anticipated that the issuance conditions would deteriorate, but they did so more quickly and more severely than expected, with a few German benchmark issues between then and now being not fully subscribed or even pulled.

The new survey released today (Thursday) gave an overall issuance conditions score for Pfandbriefe of minus 23, down from minus 14 in June and minus 10 in the first edition in December 2022. (Scores can range from minus 100 to plus 100).

Weighing heavily on the score were the current oversubscription level for issues, which came in at minus 69, and the asset swap level, at minus 78. The asset swap score for the coming six months is slightly higher, at minus 69, while that for oversubscription rises to minus 20.

Most encouragingly, investor demand in general is seen as having improved from minus 44 in the past six months to minus 32 at present, and with a positive score of 37 for the next six months – also better than the plus 14 for demand anticipated in the June survey.

“The good news is that investor demand is seen improving over the next six months quite substantially,” Sascha Kullig, member of the management board, vdp, told The CBR. “The overall negative score for Pfandbriefe comes not so much from expectations for the coming six months, but mainly from negative figures regarding the last six months and the current situation.”

He noted that heavy supply at the short end in the first half the year had been followed by a quieter second half, with longer dated issuance discouraged among issuers and investors by the inverted yield curve and the market overall impacted by rates volatility.

“We could see more demand and supply at the longer end, beyond five years,” suggested Kullig. “The market is now pricing in some rate cuts – I’m not completely convinced this will result in more longer maturities, but at least there is some hope.”

Of the 38 member institutions surveyed, the vast majority expect two cuts from the ECB of 25bp each during 2024, although seven foresee the deposit rate higher at the end of the year than at the start.

Another bright spot for Pfandbrief in the survey is the premium to Bunds, with the current and future scores slightly down but again the highest sub-score, at plus 50 and plus 36 respectively.

While the aggregate score for Pfandbriefe has declined since the June survey, the issuance climate score for senior unsecured bonds has improved, from minus 29 to minus 21, with all sub-scores improving except that of current oversubscription levels. This means that the aggregate result of the secured and unsecured scores comes in at minus 22, down marginally from 21 in June.

Source: vdp, Börsen-Zeitung, Grafik

The sub-score in respect of lending business to be refinanced in the next six months has risen from a low of minus 81 in June to minus 53, while upcoming maturities is up from minus 12 to plus 6.

“The survey results reflect ongoing challenges on the capital and property markets, but at the same time give cause for optimism in 2024,” said Kullig. “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.”

In a separate vdp survey, its member banks – which have a 96% share of outstanding Pfandbriefe – expect a new Pfandbrief issuance volume of €49.5bn in 2024, with mortgage Pfandbriefe accounting for €41.1bn and public sector Pfandbriefe €7.9bn. This would result in net growth of €4.5bn, given maturities of €45bn in 2024.

Some €36.3bn of the issuance is expected to be in the form of euro benchmarks, €8bn of it in jumbo format of €1bn or more. This is higher than levels forecast by analysts for Pfandbriefe – several of which are around €31bn-€34bn, but which reach as low as €24bn – and in some cases higher than their forecasts for France, which is widely seen as being the biggest source of supply next year. The amount anticipated by vdp members also almost matches new issuance this year, with some €37bn of supply in 2023, excluding taps.