European lenders were scrutinized on Thursday as analysts evaluated the potential contagion risks stemming from commercial real estate market challenges.
Deutsche Bank faced particular attention, with analysts at KBW noting the bank’s limited capacity to absorb losses in the asset class without raising concerns about its ability to meet investor payouts. Concerns were further fueled by Deutsche Pfandbriefbank’s (PBB) declining performance, with Barclays analysts highlighting the bank’s relatively small provisions.
While Deutsche Bank grappled with these issues, other European banks such as Societe Generale, Credit Agricole, and Italy’s Intesa Sanpaolo sought to reassure investors. Intesa CEO Carlo Messina emphasized the bank’s minimal exposure to the troubled sector, expressing confidence in avoiding negative surprises in 2024.
The unease among investors and executives stemmed from rising defaults in commercial real estate, exacerbated by last year’s spike in interest rates and the shift to remote work. PBB’s bonds suffered amid concerns about its exposure to the distressed US market, prompting broader anxieties across Europe’s banking sector.
Barclays noted that Banco Santander and Deutsche Bank had “notable” US commercial real estate loan portfolios, contributing to share declines of about 5% for Santander and over 8% for Deutsche Bank this week.
KBW analysts raised concerns about Deutsche Bank’s exposure to commercial real estate, highlighting its high relative and absolute exposures coupled with relatively low provisions for early-stage defaults. This precarious position limits the bank’s capacity to absorb potential losses without affecting investor payouts.
Despite Deutsche Bank’s efforts to address the situation by doubling provisions for US commercial real estate loans in the fourth quarter, concerns persist. The bank’s exposure to US commercial real estate loans amounts to about 3.5% of its total loan book, raising questions about its resilience in the face of market challenges.
Meanwhile, PBB, which issued a profit warning in November, disclosed higher provisions for souring loans amid what it described as the “greatest real estate crisis since the financial crisis.” Despite this, the bank remains optimistic about posting a pre-tax profit for the last year.
While the broader European banking sector navigates these challenges, experts like Luis Buceta from Creand Wealth Management emphasize that US commercial real estate may pose specific problems for certain lenders rather than being a systemic issue across the continent.
