US commercial real estate concerns hitting German lenders

German lenders including Deutsche Pfandbriefbank are seeing their share prices impacted by US commercial real estate exposure.

Munich-headquartered lender Deutsche Pfandbriefbank (PBB), which last week reassured investors it is in good financial health after concerns rose over its exposure to the US commercial real estate market, continues to see volatility in its share price.

The bank’s shares opened at €4.49 on the Frankfurt Stock Exchange on Monday, down from around €5.27 one week ago and substantially lower than their 52-week high of €9.44. PBB’s share price started to decline on February 6, after New York-based investment bank Morgan Stanley advised their clients to sell bonds issued by the German lender because of its allocation to US commercial real estate.

The bank, which has about 15 percent of its €32.1 billion commercial real estate loan book allocated to the US, responded to the call with a pair of unscheduled announcements last week. In a February 7 missive, the bank reassured investors it was “still profitable” even in the “biggest real estate crisis” since the global financial crisis.

However, PBB noted its loan loss provisions have increased significantly. The bank stated it had made loan loss provisions between €210 million-€215 million for US commercial real estate for 2023 – much higher than the €44 million it set aside in 2022. Despite these higher reserves, PBB reported it had generated earnings of €90 million in the 2023 financial year and emphasized this was “within the range” last reported in its November earnings forecast.

In a second statement, PBB also reassured the markets over its liquidity coverage ratio, saying it was twice the amount regulations require and provided a liquidity buffer that would allow the bank to operate for more than six months without any additional capital market funding.

PBB declined to comment.

Bigger picture

PBB is not alone in its troubles in the US. Deutsche Bank, another German lender, and Japan’s Aozora, have also reported significant losses from real estate loans in the US market in recent weeks.

In the US, New York Community Bancorp, a regional bank based in Hicksville, New York, saw its share price drop by 40 percent after the lender posted a surprise quarterly loss of $252 million versus net income of $207 million for the previous period and increased allowances for troubled commercial real estate loans.

Against this backdrop, Treasury Secretary Janet Yellen on February 8 said losses in commercial real estate were a worry, as concerns grow that markdowns on the value of properties in the US have further to go. The statement, which came almost one year after Californian lender Silicon Valley Bank collapsed and two other regional US lenders followed, was tempered by a 60 Minutes interview last week with Federal Reserve Chair Jerome Powell.

In the interview, Powell said he believes the current commercial real estate situation at small and regional banks demonstrates weakness – but is also manageable. Powell also underscored that he does not believe the situation today in the market will lead to a repeat of the 2007-08 global financial crisis.

Investor reaction

Despite PBB’s reassurances, the bank last week saw one of its larger shareholders reduce its holdings. German public sector trust the RAG Foundation cut its stake in the lender from 4.5 to 2.94 percent on February 9.

PBB continued lending to both the US and Europe during 2023, with €4.2 billion of new business during the first three quarters of the year, following €9 billion in 2022.

Loans during that period included a €90 million, five-year facility to Swedish residential property company Heimstaden Bostad and two debt facilities totalling €240 million to manager Boreal IM to refinance logistics assets across the Netherlands, Spain and the UK.

The lender is due to report its preliminary annual results on March 7, where it will be at liberty to provide a fuller financial picture on its US loan book, as well as how its European real estate lending is faring under higher interest rates.

Concerns are also growing around distress in Germany, Europe’s largest real estate market. In January, BaFin, Germany’s financial regulator identified specialised property lenders as facing a “cluster risk” because those companies could not offset losses in other business areas. “Highly specialised business models or poor selection of properties by banks could even cause difficulties for individual institutions,” it said.