More Dominoes: US CRE Downturn Sends German Lenders Into Turmoil


A severe downturn in the US commercial real estate property sector has already sent some banks in New York and Japan into full-blown crash mode because of their high CRE exposure. This turmoil is now beginning to affect European banks as well. 

Bloomberg reports that real estate-focused German lenders were hammered this week after Morgan Stanley analysts told clients to sell senior bonds linked to Deutsche Pfandbriefbank AG due to the lender’s high exposure to the US CRE market. 

The bank’s €150 million ($161 million) tier 2 bond was indicated 17.4 cents lower at 52 cents on the euro on Tuesday, by far its biggest one-day drop, while its senior bonds followed suit. A more junior €300 million additional tier 1 note fell 9.5 cents, an even sharper drop than the loss it recorded in the aftermath of Credit Suisse’s AT1 wipeout last year. The latter two securities slipped further on Wednesday. -Bloomberg

Besides Pfandbriefbank, the most significant declines in a Bloomberg index of euro-denominated bank bonds were a €750 million AT1 by Landesbank Baden-Wuerttemberg and €300 million note by Aareal Bank AG on Tuesday. Declines continued into Wednesday. 

Shares of Pfandbriefbank have slid about 15% this month. 

“We see risks that PBB might have to further increase loan loss provisions and, thus, put pressure on its already subdued profitability,” Deutsche Bank analyst Marlene Eibensteiner told clients on Tuesday. She pointed out the turmoil is an issue of profitability and not solvency due to the bank’s capital buffers. 

“Both Deutsche Pfandbriefbank and Aareal Bank are German issuers with one of the highest commercial real estate exposures relative to their total lending,” Marine Leleux, an analyst at ING, wrote in a recent note. 

Leleux continued: “This is not without consequences as the construction and real estate sectors are expected to continue to suffer from the higher interest rates. We would, therefore, be more cautious on banks with larger exposures to these sectors.”

The German banking authority, BaFin, informed Bloomberg that they are closely monitoring German banks and the CRE market.  

“BaFin has a watch on the current market developments and is reflecting them in its supervision,” a spokesman for the agency told Bloomberg in an email. 

According to market participants, traders have had no success selling Pfandbriefbank bonds this week unless they take a massive haircut. 

Just last week, Aozora Bank, the 16th largest in Japan by market value, saw shares crash after slashing the value of some of its US office tower loans by more than 50%. 

Several months ago, we predicted the “Next bank failure will be in Japan.” 

Overnight, Moody’s cut all long-term and some short-term ratings of New York Community Bancorp to ‘junk’ (Ba2 from Baa3) over the bank’s high exposure to the multi-family CRE space. Shares of the bank have collapsed to 1997 lows. 

Here are the regional banks with the biggest CRE loans relative to capital. 

Analysts at Green Street warned one major concern is that the value of CRE properties could see further writedown this year, upwards of 15%. 

Is the US CRE turmoil triggering the beginnings of another global banking crisis? If so, banks with high exposure to CRE loans could fall like dominoes. 


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