German Mortgage Lender Faces Crisis as Souring US Commercial Property Loans Surge
Deutsche Pfandbriefbank (PBB), a small German mortgage lender, is currently facing a major crisis due to a surge in souring loans tied to US commercial property. This has caused the bank’s shares to plummet and has attracted the attention of big-name hedge funds who have increased their bets against the stock. PBB’s outsized exposure to the troubled US commercial real estate sector has made it particularly vulnerable to the drop in the value of prime US locations.
The pain for PBB is only just beginning, according to Malte Schmitter, an investment associate at Petrus Advisers. The warning issued by PBB last week, along with an increase in provisioning against losses for last year, has added to fears that emerged in March 2023 following the collapse of Silicon Valley Bank. Other banks, such as Japan’s Aozora, Deutsche Bank, and New York Community Bancorp, have also flagged potentially large losses due to their exposure to the US office market.
The issue of souring US commercial property loans has become the most likely source of a “systemic credit event,” according to a survey of fund managers by Bank of America. PBB estimated in November that about 80% of the market correction in the US had already taken place. However, since then, the situation has worsened, and the bank’s credit rating was downgraded by S&P Global last week.
PBB’s shares have reached an all-time low, and the yield on its single additional tier 1 bond has surged above 40%. Spreads on its covered bonds, called Pfandbrief, have also widened significantly. Joost Beaumont, an analyst at ABN Amro, stated that these spreads are unprecedented for a German bank.
PBB’s cover pool, which consists of assets backing its covered bonds, is made up of roughly 80% commercial real estate mortgages, including a 15% exposure to US offices. The bank relies heavily on covered bond financing due to its relatively small deposit base. Analysts note that PBB is currently unable to offset elevated funding costs with higher margins in the lending business.
German banks have a history of bad credit decisions in the US, as seen during the subprime mortgage market crisis in 2007-2008. However, analysts believe that the capital buffers of the major players are more robust this time around. Germany’s real estate market is also facing its own reckoning, with commercial property prices dropping significantly.
PBB’s recent troubles are mainly attributed to its exposure to the US, as spreads on other German lenders’ bonds have tightened in anticipation of central bank interest rate cuts. Investors still have an appetite for bank bonds, just not PBB’s or Aareal Bank’s.
In conclusion, Deutsche Pfandbriefbank is currently facing a severe crisis due to its exposure to souring US commercial property loans. The bank’s shares have plummeted, and big-name hedge funds have increased their bets against the stock. The situation is expected to worsen, and PBB’s credit rating has already been downgraded. The bank’s reliance on covered bond financing and its significant exposure to the troubled US commercial real estate sector have made it particularly vulnerable. However, analysts believe that the capital buffers of major German banks are more robust this time around. Germany’s real estate market is also experiencing a downturn, with commercial property prices dropping significantly.
