June 13, 2024

German Banks Navigate US Commercial Property Downturn with Covered Bonds and Deposits


As the impact of the US commercial property downturn reverberates globally, German banks, including Deutsche Pfandbriefbank AG and Aareal Bank AG, are exploring avenues such as covered bonds and deposits to mitigate the challenges posed by higher unsecured borrowing costs. Barclays Plc analysts emphasize the critical importance for these banks to maintain access to deposit and covered bond markets, considering them key variables for managing near-term uncertainties.

The vulnerabilities of German banks are exposed as investors scrutinize their loan books for potential bad loans tied to the US commercial real estate market. Deutsche Pfandbriefbank, also known as PBB, acknowledged the “persistent weakness” in real estate and increased loan-loss provisions. Similarly, Aareal Bank reported a more than fourfold rise in the value of US non-performing loans over the previous year in November.

Barclays analysts, led by Cristina Costa, highlight the significance of covered bonds, regarded as the safest type of bank debt secured by assets, typically mortgages. Covered bonds provide a steady and reliable source of funding, offering German banks a lifeline amid market uncertainties. In contrast, unsecured bonds, such as additional tier 1 bonds, have experienced price volatility and increased risk perception. PBB’s additional tier 1 bonds have witnessed a sharp decline from 60 cents on the euro to 35 cents within a week, indicating heightened market concerns.

While PBB asserts no urgent financing needs and maintains a cushion of more than six months before unsecured refinancing is necessary, the challenges posed by its undiversified business model and exposure to a €5 billion US commercial real estate book persist. Aareal Bank’s covered bond offering last month encountered limited demand, underscoring potential tiering among investors.

The analysts foresee increased investor caution around specialized property lenders like PBB, leading to a heightened risk of spread differentiation in German covered bonds. The uncertain trajectory of the US commercial property market continues to influence investor sentiment and poses challenges for German banks, necessitating strategic measures to ensure stable funding and navigate the evolving financial landscape.

Financial Desk

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