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German Banks Face Surge in Non-Performing Commercial Property Loans Amid Changing Market Dynamics

German banks' non-performing property loans soar to €13.6 billion, driven by higher interest rates and changing consumer behaviors.

By Mackenzie Crow

4/4, 07:36 EDT
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Key Takeaway

  • German banks' non-performing commercial property loans surged to €13.6 billion in Q4, driven by higher interest rates and changing consumer behaviors.
  • Major banks set aside €2.3 billion for potential losses, with Helaba alone provisioning €556 million due to a significant client relationship.
  • Deutsche Pfandbriefbank faces challenges in the US market, with non-performing loans doubling to €600 million amid falling valuations and high vacancy rates.

Rising Loan Defaults

German banks have experienced a significant increase in customers struggling to repay commercial property loans in the fourth quarter, with non-performing loans in this sector jumping to €13.6 billion ($14.8 billion) at the end of December from €9.7 billion three months earlier. This rise in defaults is attributed to higher interest rates and shifts in consumer behavior, including the impact of the pandemic and the adoption of work-from-home policies, which have reduced demand for office space. The European Banking Authority's data indicates that the share of soured commercial property debt at German banks has surpassed that of the wider region.

Banks' Provisions and Losses

In response to the growing risk of defaults, ten of the biggest German banks have set aside €2.3 billion of provisions for potential losses on commercial real estate loans. One notable example is Helaba, which increased its loss provisions in the real estate segment to €556 million ($608 million) in 2023, up from €33 million in the previous year. This move was largely driven by a "single client relationship," with Helaba being a key creditor to Rene Benko’s Signa group. Despite these challenges, Helaba reported an increase in pre-tax profit to €722 million, compared to €633 million in 2022.

Deutsche Pfandbriefbank's Challenges

Deutsche Pfandbriefbank (PBB) is facing significant challenges, particularly with its exposure to the US property market. The bank's non-performing US loans doubled to €600 million in 2023, reflecting the broader issues of tumbling valuations and high vacancy rates in the US office market. PBB's CEO, Kay Wolf, remains optimistic, citing €6 billion of liquidity and a CET1 ratio of almost 16 percent. However, the bank's development portfolio, which includes loans tied up in land and building sites, appears particularly vulnerable to the current market conditions.