German Banks Look to Reduce US Office Exposure

Several German banks have taken action recently to reduce their loan exposure to the US office sector on concerns about commercial real estate losses.

The moves come after bond and equity prices plunged in February when the lender then known as New York Community Bancorp cut dividends to build a bigger loss buffer. The New York Federal Reserve recently warned that banks have extended the maturity of their distressed CRE mortgages and ignored potential risks – otherwise known as extend and pretend – to avoid further depleting their capital.

The European Central Bank is now expected to require German banks to recognize unrealized losses on American assets as values have fallen precipitously, according to a Bloomberg report.

Deutsche Bank AG is nearing a deal to sell about $1 billion of loans linked to the US CRE sector. Meanwhile, Deutsche Pfandbriefbank AG, which recently entered a strategic CRE lending partnership with Starwood Property Trust Inc., is reducing office and American loans after designating hundreds of millions of Euros to offset potential losses, according to Bloomberg. Landesbank Hessen-Thueringen Girozentrale is exploring a sale of its position in a portfolio of loans linked to US offices, and Aareal Bank AG reduced its nonperforming US office loans by $543 million.

German lenders have higher exposure to US CRE assets than most of their European peers, the Bloomberg report said. Lending issues take longer to emerge in the region because banks value domestic assets annually, compared with quarterly or more frequently in the United States, which has led to increased volatility.

Optimism about the office sector has been boosted by the Fed’s September rate cut, however. Undisclosed pricing for Deutsche Bank’s loan portfolio indicates the CRE market could be stabilizing, said Bloomberg.