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Moody's eyes property loan threat to German banks

[FRANKFURT] Germany's sharply rising residential property market could pose a threat to the country's banks in the event of a subsequent price correction, credit rating agency Moody's said on Monday.

The warning is pertinent given the billions of euros worth of new mortgages being granted by the banks and given the roots of the 2007-2009 financial crisis in over-ambitious mortgage lending, albeit mostly in markets outside Germany.

Moody's cited data published by Germany's central bank, the Bundesbank, last week that pointed to prices outpacing both economic and demographic fundamentals, especially in seven big cities where prices have risen by 40 per cent since 2010.

Ultra-low interest rates and the arrival of more than 1 million refugees to Germany last year are helping to heighten demand for property, especially in cities.

Moody's said residential property inflation was a credit negative for banks with high exposure to residential property lending because of the risk of a retrenchment.

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Rising property prices have diminished the loan-to-value (LTV) ratio of loans made several years ago, but this positive effect has been outweighed by banks' aggressive expansion of new lending at higher property prices in 2015. "New business volumes increased to 244 billion euros (S$378 billion) in 2015 from 200 billion the previous year," said Moody's Associate Managing Director Alexander Hendricks.

Loans where the LTV ratio was above 100 per cent had risen to 16 per cent of total housing loans in 2015 from 15 per cent a year earlier, Moody's said.

But this could rise to more than 40 per cent if property prices were to retreat to 2010 levels, it said.

Should a customer default, banks typically face higher loss charges for high loan-to-value exposure than for low LTV exposures.

"If there would be a price correction, which we are not forecasting here, a materially increased amount of mortgages would fall back into the category of loan-to-value of 100 per cent or more," Mr Hendricks said.


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