German banks preparing for wave of loan defaults in the face of major real estate crisis

German real estate lender Deutsche Pfandbriefbank is preparing for what it says will be the steepest drop in commercial property values seen in the country in 15 years.

During the fourth quarter of 2023, the bank raised its provisions for losses on loans, setting aside more than $230 million for the year to prepare for bad debts in light of the “persistent weakness of the real estate markets.”

The bank noted: “Despite these expenses, PBB remains profitable thanks to its financial strength — even in the greatest real estate crisis since the financial crisis.”

Their statement was referring to the 2008 financial crisis, when banks collapsed in the wake of sizeable losses on mortgages and securities after the U.S. housing market bubble burst.

PBB said that it currently has sufficient cash and liquid assets to continue for the next six months without any additional funding from investors.

It is the second bank in Germany to warn about losses related to commercial real estate in recent weeks. Its stock, which has dropped more than 25% this year, fell 17% since its announcement on Friday.

Last week, the biggest German bank, Deutsche Bank, announced that it allocated $133 million during the fourth quarter of 2023 to help with potential defaults on commercial real estate loans in the U.S., which was more than four times the amount they set aside for this purpose during the last quarter of 2022.

German banks are being affected by problems in the U.S. as well as at home. The German banking association VDP reports that office property prices there dropped by 5.2% during the last quarter of 2023 and more than 13% year-on-year.

Meanwhile, the Japanese financial institution Aozora Bank said that its projected annual loss of $190 million can be partly attributed to bad loans related to American offices, while the private Swiss bank Julius Baer reported a drop in profits of 55% during 2023 due to a $680 million loss on loans to a European conglomerate.

Banks are in trouble again

Bank balance sheets have been a hot topic recently, with U.S. Treasury Secretary Janet Yellen telling lawmakers she has some concerns about commercial real estate exposure at some banks.

She stated: “I believe it’s manageable, although there may be some institutions that are quite stressed by this problem.”

Canada’s bank regulator has also classified losses on commercial real estate loans as a manageable risk for the biggest banks there.

The financial crisis that caused three American regional lenders to collapse last year is still fresh in many Americans’ memories, and there are fears that a repeat could be on the horizon, possibly involving even more banks this time around.

Last week, U.S. regional lender New York Community Bancorp’s credit was downgraded by Moody’s to junk. It is trying to reassure investors it will be able to remain afloat, but its stock has lost roughly 60% of its value during the last eight days.

The drama began when they reported an unexpected loss of $252 million during the fourth quarter, much of which is being attributed to loans for office buildings. They also set aside $552 million during that quarter for absorbing potential losses on loans, marking a significant rise over the $62 million set aside for the same purpose during the previous quarter.

The commercial real estate lending sector has been hit hard by inflation and the slow return to work after the pandemic, with many employees working from home on a more permanent basis. The full impact of this may have not been fully priced in yet, some experts believe, which means the situation could get even worse.

Sources for this article include:

CNN.com

ProactiveInvestors.com

FinancialPost.com