Euro Banks & U.S. CRE: Low Exposure, Low Disclosure

Simon Adamson - Head of Financials
Paola Biraschi - Head of Southern European Banks
Puja Karia - Head of Western European Banks
Jennifer Ray - Head of Northern European Banks
Feargus Haston - Analyst, Banks

EXECUTIVE SUMMARY
  • Losses at NYCB earlier this month on the back of substantial commercial real estate (CRE) provisions have sparked concerns about the possible exposure of European banks to US CRE.
  • Our colleagues in New York opined that there was no real read-through to the rest of the US banks, with NYCB’s disastrous 4Q23 print driven by the consequences of bulking up and moving into a stricter regulatory framework – we share that opinion in respect of major European banks too.
  • The US CRE exposure of major European banks is small – Deutsche Bank and Santander appear most exposed – although, with a few exceptions, disclosure is poor.
  • We do not see US CRE as an issue for the European banking system – any increase in loan impairments should be absorbed comfortably.
  • However, the problems could become more severe for smaller, more specialised property lenders, which is why a handful of German banks, most notably Deutsche Pfandbriefbank, have seen sharp falls in share and bond prices.
RELATIVE VALUE

At this stage we see nothing in the US CRE data to change our existing recommendations on European banks, including our Outperform recommendation on Deutsche Bank’s non-preferred senior and our Cheap recommendation on its Tier 2. The 10-15 bp spread widening on Deutsche Bank in the past week looks overdone to us, although market concerns about US CRE are likely to persist in the near term.

Commercial real estate (CRE) lending, and more particularly US CRE, is back in the spotlight after the losses posted recently by New York Community Bancorp (NYCB). Most of the concerns surround a few smaller German specialised property lenders, in particular Deutsche Pfandbriefbank, whose shares are down 19% since the beginning of February, with its AT1s down 24 points to 35c. However, some of that negative sentiment has started to affect other larger German and European banks too. Deutsche Bank’s disclosure that 20% of its FY23 loan impairments were for US CRE (see below) also contributed to the worsening sentiment.

Our colleagues in New York are quite clear on the implications of NYCB’s losses, stating there is “no real read-through to the rest of the banks, with NYCB’s disastrous 4Q23 print driven by the consequences of bulking up and moving into a stricter regulatory framework (and/or management not understanding those consequences to begin with)”. We think that applies to major European banks too, especially given their relatively small exposure to US CRE. That is not to underplay the weaknesses in the CRE sector in the US, and the potential for further credit losses there and in Europe, but any losses will not be on a scale that will damage major European banks.

The caveat is that a small number of more specialised property lenders have proportionately higher exposure to US CRE, sparking the recent slides in share and bond prices – the focus has been on Deutsche Pfandbriefbank (pbb) and Aareal Bank, neither of which is covered by CreditSights. As a comparison, US CRE lending at pbb (at 30 June 2023) was, at €4.8 bn, over 170% of CET1 capital versus 21% at Deutsche Bank.

Our last survey of European banks’ CRE exposure was published in July 2023. We will be looking to update that once banks have published their 2023 results and annual reports. In the meantime, disclosure of CRE exposure remains patchy, and disclosure of US CRE exposure is especially sparse. This note summarises what we have uncovered so far.

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