BONDS of Deutsche Pfandbriefbank (PBB) tumbled deeper into distressed territory on Thursday (Feb 15) after S&P Global Ratings downgraded the German lender citing its high exposure to the beleaguered US commercial property market. Shares fell as much as 12 per cent to a record low.

The ratings firm revised its rating for the issuer to BBB-, one level above junk. Analysts at S&P said the bank’s non-performing loans ratio likely jumped to 3.9 per cent of total loans at the end of 2023 due to its high exposure to commercial real estate, particularly in the office and retail segments.

Banks around the world are starting to report losses on loans made to commercial real estate projects after the rise in interest rates dented property valuations. The problem is even more acute in the US market, which represents 15 per cent of PBB’s total commercial real estate portfolio, due to an increase in remote working following the pandemic.

The European Central Bank has signalled that lenders may face higher capital requirements if they have an insufficient handle on risks related to commercial real estate.

PBB’s bonds have been declining steeply over the last few weeks as earnings reports from lenders including New York Community Bancorp and Japan’s Aozora Bank showed the impact of loans that have turned sour. The move was exacerbated when analysts at Morgan Stanley recommended selling PBB’s senior bonds in a call with clients.

PBB’s perpetual notes lost four cents on the euro to around 30 cents, according to CBBT data compiled by Bloomberg. Its senior notes due in 2027 also dropped 2.5 cents to 90 cents.

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PBB is due to report full-year results on March 7, but has already disclosed that its provisions for 2023 will be as much as 215 million euros (S$311 million). Pretax profit for the year is expected to reach 90 million euros, at the bottom of its already downgraded range.

S&P analysts point out that PBB’s funding base lowers its needs to access capital markets this year to tap further funding. The bank disclosed a liquidity coverage ratio last week of 212 per cent at the end of 2023, double the minimum regulatory requirement.

Aareal Bank, another German lender with exposure to the US commercial property market, had its credit rating cut to BBB, two levels above junk, by Fitch Ratings on Wednesday. Fitch expects further impaired loans to increase Aareal’s impaired loan ratio to a 4 per cent four-year average at the end of 2023.

Aareal’s Additional Tier 1 notes were down by around one point on Thursday and quoted at around 75 cents on the euro, according to data compiled by Bloomberg. BLOOMBERG