European Banks Hit By Fears About U.S. Real Estate
The price of shares and bonds related to two of Europe’s largest property lenders took a fall in recent days, and worries about their exposure to distressed U.S. commercial real estate are to blame.
Shares in Deutsche Pfandbriefbank AG have dropped 17% in the past five days, while bonds in Aareal Bank dropped 10 cents euro (11 cents U.S.) to 76 cents euro (82 cents), Bloomberg reported. Both companies are based in Germany, and property lending makes up a major part of their businesses.
Morgan Stanley held a call with clients on Tuesday advising them to sell Deutsche PBB bonds, Bloomberg reported. The following day, PBB put out an unscheduled announcement to say it had increased provisions for losses on distressed loans.
PBB cited persistent weakness in the market, calling it the “greatest real estate crisis since the financial crisis.”
Even so, PBB said it would still turn a profit for 2023. Its loan loss provision for 2023 is expected to be between €210M and €215M ($226M-$231M, £176M-£183M), and its profit was €90M, in line with guidance issued last November. It stressed that it had adequate liquidity to absorb any losses it might make on its property loans.
Investment bank Natixis said in a research report last summer that PBB and Aareal might have to raise new capital to meet regulatory requirements because of loan losses, an analysis both lenders refuted.
PBB has a €32B ($34B, £27B) commercial real estate loan book, according to a third-quarter presentation, with 15% in the U.S. and 8% in the UK. Of its U.S. portfolio, 80% is in the office sector. PBB said €691M of its €4.8B U.S. portfolio is nonperforming.
Aareal was taken private at the end of last year by a consortium that included private equity firm Advent International, the Canada Pension Plan Investment Board and Goldman Sachs. It took a €102M loan loss provision in Q3, primarily on U.S. office properties, taking its total losses to €262M for the first three quarters of the year.
In recent days, other international banks, including Deutsche Bank and Japan’s Aozora, reported significant losses on U.S. commercial real estate loans. In the U.S., New York Community Bank's stock was cut to junk status by Moody's Investors Service late Tuesday.
“There are serious concerns in the U.S. CRE market,” Rabobank credit strategist Paul van der Westhuizen told Bloomberg. “It’s not an issue for larger U.S. and European banks, but the smaller property-focused German banks are feeling a bit of pain.”
The UK’s two largest property lenders, Lloyds and NatWest, have virtually no disclosed exposure to U.S. commercial real estate, according to a Bisnow analysis of financial reports.
About €360M of PBB’s €2.6B UK loan book is nonperforming, the bank said in its Q3 presentation, its second-largest concentration of NPLs.
