Yields on bonds from German banks spiked due to worries about their US commercial real estate exposure, triggered by profit forecast revisions, acquisitions, and broader market turmoil, raising concerns about their ability to withstand regulatory scrutiny and access fresh funding.
In the wake of escalating concerns over their exposure to the faltering U.S. commercial real estate market, bonds of German banks, including Deutsche Pfandbriefbank (PBB), Aareal Bank, and Landesbank Baden-Württemberg (LBBW), have witnessed a significant surge in yields over the week.
PBB's 2027 senior bond (DE000A30WF84) surged by 217 basis points to 6.4%, Aareal Bank's 2027 (DE000AAR0264) by 149 basis points to 5.8%, and Landesbank Baden-Württemberg's 2026 (via Berlin Hyp, DE000BHY0BP6) by 36 basis points to 4.3%. All these bonds have a euro denomination.
Meanwhile, the banks' riskier subordinated bonds were hit much harder, with PBB's AT1 perpetual bond (XS1808862657) price falling to 33 cents on the euro, while Aareal Bank (DE000A1TNDK2) and LBBW (DE000LB2CPE5) saw their perps prices fall to 74 and 77 cents on the euro, respectively.
The surge in yields primarily stems from mounting apprehensions about the banks' engagement in the US commercial real estate sector. Concerns escalated following PBB's downward revision of its profit forecast in November, triggering investor apprehension. PBB, under the leadership of CEO Arndt, has faced particular scrutiny due to its substantial exposure to US office properties, with loans amounting to €4.8 billion ($5.2 billion), surpassing its total equity.
The broader real estate turmoil, exacerbated by increasing defaults in the US property market, has raised fears of contagion, impacting not only PBB but also other major German banks like Aareal Bank and LBBW. Aareal Bank's recent acquisition of a Berlin-based lender in 2022 and LBBW's exposure to German developers have further magnified investor concerns regarding their real estate portfolios.
PBB's expansion into the US market, once viewed as strategically advantageous, is now subject to criticism amid the accelerated trend toward remote work catalyzed by the COVID-19 pandemic. Additionally, PBB's involvement in loans to the now-failed Austrian real estate empire Signa Holding has compounded its challenges, highlighting broader issues in its lending practices.
Despite reassurances from spokespeople regarding the banks' liquidity positions and operational resilience, doubts linger regarding their ability to navigate the turbulent real estate landscape, especially amidst potential hurdles in accessing fresh funding. Heightened regulatory scrutiny from the European Central Bank, coupled with stringent capital requirements, further underscores the obstacles ahead for these institutions.
S&P Global Ratings downgraded Deutsche Pfandbriefbank's long-term issuer credit ratings on November 17, 2023, from 'BBB+' to 'BBB', citing increased risk costs in Q3 2023 and assigning a negative outlook. Aareal Bank maintains a 'A3' long-term issuer rating from Moody's and a 'BBB+' long-term issuer default rating from Fitch, with Fitch highlighting its strong capitalization, boasting a leverage ratio of 6.2% as of the first half of 2023, surpassing industry peers. Meanwhile, Landesbank Baden-Württemberg (LBBW) boasts a 'Aa3' long-term issuer rating from Moody's and a 'A-' long-term issuer default rating from Fitch.
Deutsche Pfandbriefbank AG provides commercial banking services across three segments: Real Estate Finance, Public Investment Finance, and Value Portfolio. The Real Estate Finance segment offers financing to professional real estate investors, including office buildings, residential properties, retail and logistics spaces, and hotels. In the Public Investment Finance segment, the bank finances projects eligible for covered bonds aimed at enhancing public infrastructure. The Value Portfolio segment comprises non-strategic portfolios and activities within the pbb Group. Established on June 1, 1922, the company is headquartered in Garching, Germany. Deutsche Pfandbriefbank AG has a market capitalization of €604 million as of February 09, 2024.
Aareal Bank AG provides property financing and consultancy services across three key segments: Structured Property Financing, Banking and Digital Solutions, and Aareon. The Structured Property Financing segment handles property financing and refinancing, while the Consulting Services segment delivers services and products tailored for housing and commercial property management, including payment processing. Aareon focuses on offering user-oriented ERP software and digital solutions to streamline processes and promote sustainability in the European property industry. Founded on July 20, 1923, the company is based in Wiesbaden, Germany. Aareal Bank AG has a market capitalization of €1.99 billion as of February 09, 2024.
Landesbank Baden-Württemberg specializes in property financing and consultancy services, offering tailored solutions across segments including Property Financing, Banking and Digital Solutions, and Consultancy Services. With a focus on innovation, LBBW provides ERP software and digital solutions to enhance operational efficiency and promote sustainability in the European property industry. Established in Stuttgart, Germany, LBBW continues to be a leading player in finance and real estate sectors.