vdp Issuance Climate: situation on the capital market to remain challenging in 2023
Berlin, 16 December 2022
- Pfandbrief banks expect high demand for Pfandbriefe to continue and more difficult issuance environment for unsecured bonds in 2023
The situation on the capital market will remain challenging next year. This is the outcome of a survey the Association of German Pfandbrief Banks (vdp) has conducted for the first time among capital market experts of vdp member banks. The survey results indicate that high inflation figures combined with fears of a recession as well as the war in Ukraine will continue to cause high volatility and uncertainty.
The vdp will be publishing the findings of the survey, which will henceforth be conducted twice a year, under the heading “vdp Issuance Climate”. At the moment the sentiment indicator, which ranges from -100 to +100 points, stands at -17 points. This represents a slightly gloomy mood, whereby the scores for Pfandbriefe (-10) and unsecured bank bonds (-26) reflect different assessments of the two sub-markets. Overall, therefore, the capital market experts expect light headwinds on the primary market in 2023 due to the ongoing economic burdens resulting from the Ukraine war, soaring energy costs and inflation rates as well as the ECB’s restrictive policy.
Scoring December 2022
Score for Pfandbriefe: -10
Score for unsecured bank bonds: -26
Overall score: -17
Methodology
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. From this, separate scores are calculated 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 implemented without any problems. Negative (maximum -100) and positive scores (maximum +100) indicate a less or more favourable issuance environment respectively.
High demand for Pfandbriefe meets lower supply
With regard to the issuance of Pfandbriefe, demand is expected to remain high while supply is likely to be lower. The experts participating in the survey expect a pronounced decline in lending to be refinanced and, with that, a lower Pfandbrief issue volume. This is a major reason why the score for Pfandbriefe in the vdp Issuance Climate survey tends slightly towards the negative.
It is assumed that the ECB will, initially, further scale back its reinvestments in covered bonds as part of the asset purchase programme, and probably discontinue them entirely during the course of 2023. At the same time, however, capital market experts believe that traditional investors, who have been squeezed out of the market in the meantime, will return to the market in growing numbers. Pfandbrief investments are again offering adequate returns for life insurance companies, pension funds and other investors.
“The uncertainty on the capital market is palpable, and the situation will remain challenging in 2023. In this environment, Pfandbriefe will continue to be attractive both for risk-aware investors and for Pfandbrief banks,” said Sascha Kullig, Member of the Management Board of the vdp, to sum up his expectations for 2023.
New mortgage Pfandbrief sales of just under EUR 41 bn planned for 2023
Against the backdrop of the current decline in lending, two-thirds of the surveyed banks believe the supply of new Pfandbriefe in 2023 will be down on the previous year. Overall, the vdp member banks estimate total sales of new mortgage Pfandbriefe will be just short of EUR 41 bn. With maturities totalling just under EUR 28 bn, this corresponds to net new issues of just under EUR 13 bn. This would mean a marked decrease compared to 2022. After only eleven months in 2022, new mortgage Pfandbriefe totalling EUR 59.9 bn were placed, which is equivalent to a 54% increase over the same period one year earlier.
In 2023, public Pfandbrief maturities (just over EUR 15.2 bn) are again likely to exceed planned sales (around EUR 9 bn).
Rather subdued demand for unsecured bank bonds expected
Compared to sales of Pfandbriefe, unsecured bank bond sales are expected to be more difficult in 2023, as is reflected in the score of -26 points. The vdp capital market experts expect demand here will be rather subdued in the next six months. The experts’ overall credit rating trend for banks is slightly negative in tendency. This, in turn, also has implications for how they assess the issuance environment, particularly for unsecured bonds. Given the ECB’s restrictive interest rate policy, survey participants believe capital market interest rates will continue to trend upwards somewhat in the coming six-month period.
“Unsecured refinancing is likely to pose the greatest challenge in 2023. The difficult environment will have a much stronger impact here than it will for Pfandbriefe,” said Kullig.
About the vdp Issuance Climate
The vdp Issuance Climate survey provides twice-yearly information on the sentiment among the member banks of the Association of German Pfandbrief Banks (vdp) with regard to the placement of Pfandbriefe and unsecured bank bonds. To this end, experts of the vdp member banks are asked about the influences determining 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 individual replies are grouped together into topic areas which provide an overview of the supply and demand situation on the markets for Pfandbriefe and unsecured bank bonds. From this, and based on certain assumptions about the relative importance of the individual topic areas, three scores are calculated: 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 implemented without any problems. Negative and positive scores indicate a below-average or above-average issuance environment respectively.
The Pfandbrief banks belonging to the vdp represent a combined market share of just under 96% of Pfandbriefe outstanding.