European Banks: CREdit Risk Revisited

Jennifer Ray – Senior Analyst - European Banks
Simon Adamson – Head of Global Financials Research
Puja Karia – Senior Analyst - European Banks
Paola Biraschi – Senior Analyst - European Banks

EXECUTIVE SUMMARY
  • The level of investor interest in European banks’ exposures to the commercial real estate sector remains strong.
  • Stage 3 exposures and the cost of risk for the sector remain manageable, reflecting limited areas of weakness for some banks but generally solid asset quality metrics for the sector.
  • Swedish banks have the highest concentration in the property management sector but continue to display very low impairments and loans with moderate LTVs while projecting that most customers will have adequate repayment ability for the majority of their loans.
  • The Spanish and Italian banking sectors have a relatively lower level of CRE risk.
  • We expect the cost of risk in general to rise during the rest of the year, but it begins from a low base and is not expected to top through-the-cycle levels.
  • Extra disclosures made by some banks appear designed to inform and reassure investors, as no new material areas of concern were highlighted.
SUMMARY

Following the publication of our report European Banks: CREdit Risk in April, the level of investor interest in European banks’ exposures to commercial real estate remains high, partly as a result of developments seen in the US regional banking market. As we commented then, the lack of detailed data on European commercial real estate markets and banks’ exposure to the sector is a major problem for analysts.

Although the levels of information provided are variable, reviewing banks’ reports and investor presentations for 1Q23 gives us little cause for additional concern. A number of banks commented on their real estate exposures for the first time, or with added detail, but none disclosed new problem areas. In all the aim appears to have been to reassure investors. As a general rule, Stage 3 exposures and the cost of risk remain very manageable. LTV ratios for CRE exposures continue to be moderate. Banks are clearly monitoring the sector closely, but not beyond normal levels of scrutiny. CRE has been a focus for regulators for some time, especially since the financial crisis, and the major banks operating in the sector appear to have been focusing their lending decisions on well-established cashflow-based criteriaWe expect impairments related to CRE to rise for some banks during the rest of this year and possibly into 2024, as there are clearly pockets of weakness in the market, particularly in the office and retail sectors. However, we also continue to expect related impairments for banks to be contained. They are not the only lenders to the sector and are likely to continue to exercise caution in any new lending/refinancing decisions. The cost of risk across the board is likely to rise, but towards through-the-cycle ratios from the historically low levels seen in 2021/22, which should prove manageable. To the extent that headline concerns about CRE exposures exceed the reality of banks’ likely losses there may be some opportunities for investors who are prepared to dig into the details, where these are available.

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