Europe’s banks under microscope with property worries swirling

Europe’s lenders remained in the focus of investors on Thursday (Feb 8) as analysts assessed the risk of contagion from the troubles in commercial real estate markets.

Deutsche Bank has limited room to absorb potential losses for the asset class without triggering concerns about its ability to raise investor payouts, analysts at KBW wrote in a note. Deutsche Pfandbriefbank (PBB), the specialised lender at the center of contagion worries, continued its decline as analysts at Barclays argued the German bank had set aside relatively small provisions.

Other banks pushed back against concerns, including French lenders Societe Generale and Credit Agricole as well as Italy’s Intesa Sanpaolo.

“Our exposure is very limited,” Intesa chief executive officer Carlo Messina said in an interview on Bloomberg TV. “In this sector we do not expect negative surprises in 2024.”

Investors and executives have been on edge after smaller banks from New York to Tokyo were hit by rising defaults in commercial real estate, an asset class that has been been in sharp decline as last year’s spike in interest rates compounded challenges from the shift to working from home.

The concerns spread to Europe this week when PBB’s bonds slumped because of its exposure to the troubled US market.

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While many analysts argued that larger lenders are not at risk because they are more diversified, Barclays said in its note on Thursday that Banco Santander and Deutsche Bank had “notable” portfolios of US commercial real estate loans. Shares of Santander have lost about 5 per cent this week and Deutsche Bank is down more than 8 per cent.

Germany’s largest bank has “high relative and absolute exposures” to commercial real estate, yet it has set aside the lowest amount among peers for debt that is in the early stages of default, KBW analysts led by Thomas Hallett said in a note. That means it has limited room to absorb potential losses before investor payouts could be affected, according to analysts at KBW.

Deutsche Bank declined to comment. A spokesperson for Santander did not immediately have a comment. Santander’s US unit said during the presentation of third-quarter results that its commercial real estate portfolio consists mostly of multi-family lending.

Deutsche Bank last week said it doubled the amount of money set aside for US commercial real estate loans in the fourth quarter from the previous three months, to 123 million euros (S$178.3 million). At the same time, it said it expects credit provisions this year to remain in line with where they were last year. US commercial real estate loans, at 17 billion euros, amount to about 3.5 per cent of the total loan book.

“US commercial real estate is not a big issue among European banks, generally speaking, especially the biggest ones,” said Luis Buceta, chief investment officer at Creand Wealth Management. “It may cause some problems to specific lenders.”

PBB, which had issued a profit warning in November, said on Wednesday that it put aside more money for souring loans, with provisions for last year hitting as much as 215 million euros. The lender said it still expects to post a pre-tax profit for last year, despite what it called the “greatest real estate crisis since the financial crisis”. Bloomberg