EU Banks’ €1.4 Trillion CRE Loans Highlight Vulnerabilities, Bloomberg Intelligence says

by | Apr 4, 2023

EU banks’ almost €1.4 trillion of commercial real estate (CRE) loans are now on investors’ radars after SVB’s fallout raised concerns over the sensitivity of highly leveraged sectors to rising rates, with Nordic lenders the most vulnerable.

According to a new report from Bloomberg Intelligence (BI), a 5% write-off could wipe out 24% of EU bank 2023 pretax profit, making CRE risk key in 1Q results.

Thomas Noetzel and Philip Richards, Senior Industry Analysts at BI, added: “In Europe, surging interest rates and inflation and a weak economic backdrop leave loans to the sector as a key risk on bank balance sheets as investors assess where the next threat may come from. Nordic, UK, German and French banks are the most exposed, with combined exposure of 20 of the largest lenders totalling about €550billion, or 7% of total loans, equivalent to 73% of CET1 capital.”

Commercial real estate loans total €1.4 trillion across the EU, according to data from the European Banking Authority, comprising 6.4% of total loans in those markets. The European Central Bank has announced plans to strengthen its focus on banks’ exposure to CRE, noting it as “one of the most severely affected by the COVID-19 pandemic, but has also attracted considerable investment during the prolonged low interest rate environment.” CRE accounts for as much as 30% of banking non-performing loans, the ECB notes. Swedish lenders are the most exposed to the sector, at 12.3% of total loans, followed by Greece, Norway and Austria (all about 10%), while in absolute amount lenders from France and Germany have the largest exposure, at about €260 billion per country.

UK Banks and CRE? 2008 All Over Again Unlikely, But Pain Ahead

The deteriorating outlook for commercial real estate (CRE) has raised concerns over the largest lenders’ exposure to the sector, though we don’t expect this to replicate the peak of 2008 crisis when HBOS and Irish banks were laid low by overleveraged CRE exposure. The recent plan by Lloyds Banking Group to sell a loan (£175 million) secured against an office block typifies UK banks continued de-risking efforts, with the big four reducing their exposure by more than £10 billion (or 20%) since 2019. Reported loan-to-value ratios at NatWest and Lloyds appear healthy against decline in property values, with the pair assuming 22-30% drops in CRE prices in 2023 in an extreme (severe) downside scenario.

CRE’s Toxic Cocktail: Pre-Pandemic Boom, Rate Hikes, Leverage

Soaring commercial property prices leading up to the pandemic — prices have doubled in Germany since 2015, for example — leave them exposed to a potential economic downturn, given their inherent pro-cyclical nature. Typically highly leveraged, CRE firms also face a sharp spike in interest charges as rates rise, which could jeopardize their ability to service loans. To the extent that triggers lenders to offload CRE assets, prices could be pushed lower again, forming a downward spiral.

CRE loans account for around one-third of bank loans to non-financial corporates in Germany vs. 20-25% in other large euro-area countries, the Bundesbank notes, exacerbating the risk. It is not only the size of CRE exposures that are a threat to banks, but the interconnectivity between developers, banks and the wider financial system.

Related articles

Trending stories

Join our mailing list

Subscribe to our mailing list to receive regular updates!