Frankfurt The activist investor Petrus Advisers, who has made a name for himself in Germany with commitments at Comdirect, Aareal Bank and Teamviewer, is now taking on the real estate financier Pfandbriefbank (PBB). The London hedge fund is dissatisfied with the development of the Munich institute and is therefore calling for a fundamental overhaul of the strategy.
In a letter to PBB CEO Andreas Arndt and chief controller Günther Bräunig, Petrus partners Klaus Umek and Till Hufnagel complained that the currently low rating of the Pfandbrief bank reflects “significant strategic weaknesses”. The letter is dated January 31 and is available to the Handelsblatt.
According to its own statements, Petrus Advisers has a stake of “just under three percent” in PBB. The letter says the company has been in contact with the management for a long time, but has not yet responded to the demands.
“It’s time to take off the blinders and finally work meaningfully, otherwise the Deutsche Pfandbriefbank will not be able to survive as an independent institution in the long term,” the letter says, among other things. Petrus’ main criticisms are PBB’s low return on equity (RoE) and high equity ratio.
The return on equity fell from 7.4 percent in the third quarter of 2021 to 5.2 percent in the third quarter of 2022. At the competitor Aareal Bank, in which Petrus also has a stake, the return on equity adjusted for certain one-off effects rose from 4.8 to 9.5 percent in the same period. The adjustments include one-off tax effects, M&A and restructuring costs and a provision for Russian loans.
>> Read here: Pfandbriefbank wants to enter the real estate fund business
This means that PBB’s return on equity is well below the cost of capital of ten to eleven percent, explained Petrus. The fact that the Pfandbriefbank is striving for growth in its loan book despite these key figures is pointless. “They are intentionally destroying value every year by committing more capital below the cost of capital.”
“Squirrel-like accumulation” of reserves
The Pfandbriefbank justified its low profitability compared to Petrus with the high capitalization and the caution of the bank management, write Umek and Hufnagel. However, they do not believe in this argument. “The capital market does not tolerate a squirrel-like accumulation of excess reserves.”
The higher the equity ratio of a bank, the more crisis-proof it is. The more equity a bank has, the more profit it has to generate in order to generate a high return on this block of equity.
When it comes to the question of how high a bank’s equity base is, the European banking supervisors also have a say. In the past, they had repeatedly emphasized that they considered commercial real estate loans, which the Pfandbriefbank specializes in, to be risky.
Therefore, the supervisory authority is likely to be interested in high equity ratios at PBB. It is questionable, however, what level they consider reasonable.
>> Read here: ECB supervision: Banks should become more crisis-proof
In any case, the security thinking of the Munich bank goes too far for the two investors: the Petrus partners argue that no other relevant European bank has a core capital ratio that is as high as PBB’s, most recently at 16.8 percent. You have in this contexting to indicate that other institutes, such as ING, recently bought back their own shares have – and got the green light from the banking supervisors of the ECB.
In addition to the use of capital, according to Petrus, PBB must also deal with measures to increase the net interest margin and reduce costs in a “comprehensive strategic review”.
PBB counters the criticism: “We are a dividend stock”
“We have taken note of the letter published by Petrus Advisers, but come to a completely different assessment,” countered a PBB spokeswoman on request. The Pfandbriefbank is pursuing the goal of generating sustainable business success, “that is, to be stable and profitable over all cycles in order to be able to keep our promise of dividends”.
Instead of using the return on equity, the Pfandbriefbank argues with its distributions to shareholders. Since the IPO in 2015, PBB has paid its shareholders an average dividend yield of around 7.5 percent per year – a rate “well above the market average”. “Our share is a dividend stock in the truest sense of the word,” said the PBB spokeswoman.
The institute also defended the high equity ratio. “Yes, we have a good capital base. And that is good in view of the volatile market environment and the high regulatory requirements of every bank,” said a spokeswoman for the institute.
Petrus Advisers: Big profit with Comdirect
Petrus Advisers was founded in 2009 by Umek. The Austrian had previously worked as an investment banker for the US investment bank Goldman Sachs for twelve years, including in Frankfurt, London and Moscow. In 2015, Hufnagel, who had worked in private equity at Goldman for 14 years, first in Frankfurt and then in London, joined the team.
Petrus’ first high-profile engagement in Germany was when he joined the Commerzbank subsidiary Comdirect in 2017. The investor asked the institute to reduce costs and changes in the board of directors and the supervisory board.
Later, Petrus temporarily blocked the complete takeover of the Comdirect by Commerzbank. At the beginning of 2020, Umek and Hufnagel came to an agreement with Germany’s second-largest private bank to sell their stake – and made a hefty profit in the process. At that time, Commerzbank paid Petrus EUR 15.15 per share, all other Comdirect shareholders only EUR 11.44.
A little later, Petrus set his sights on Aareal Bank, criticizing the institute’s high costs, the lavish management board remuneration, low profitability, and deficits in strategy. As a result, a majority of shareholders voted against the remuneration rules for Aareal Management Board members in May 2021.
When a group of financial investors wanted to take over Aareal Bank in the same year, Petrus Advisers and other hedge funds blocked the first two offers of first EUR 29 and then EUR 31 as too low and even forced a change in the supervisory board. The hedge fund only agreed when the financial investors offered EUR 33 per Aareal share and accepted Petrus Advisers as a non-voting co-shareholder.
At Teamviewer, Petrus Advisers was among the investors who criticized an expensive sponsorship deal. The company has since given up on him.
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