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The US office market downturn has left a significant imprint on German banks with substantial international exposures, particularly Aareal Bank, pbb Deutsche Pfandbriefbank, and Landesbank Baden-Württemberg (LBBW). These institutions have had to navigate increased risks and adapt their strategies accordingly, reshaping expectations for future performance.
Aareal Bank has responded to the challenging US market by bolstering its risk provisions while achieving a robust increase in profits. In the first quarter of 2024, Aareal's operating profit surged by 66% to €103 million, supported by a 14% rise in net interest income and a 19% increase in net commission income. Despite these gains, the bank set aside €83 million for risk provisions, a decrease from the previous quarter's €193 million but still elevated. Still-CEO Jochen Klösges (he's leaving the bank in August) remarked on the selective approach to financing, especially emphasizing energy-efficient projects. He cautiously noted signs of recovery, although the market remains volatile.
Conversely, pbb Deutsche Pfandbriefbank reported a modest increase in pre-tax profits to €34 million for the same period, underpinned by stringent risk management strategies. The bank has initiated significant divestitures of non-core loan portfolios, particularly in the US and UK, as part of its strategy to stabilise its financial base amidst ongoing market challenges. CEO Kay Wolf expressed confidence in the bank's fundamental health and profitability, despite rising risk provisions for bad loans which amounted to €47 million.
LBBW, having a broader exposure to the US commercial property market with about €5 billion invested, is facing similar pressures. Despite this, CEO Rainer Neske is optimistic, viewing the bank's US engagements as manageable within the broader portfolio. LBBW's diversified operations across various customer segments provide a buffer against the real estate crisis's impacts. After acquiring Berlin Hyp in 2022, LBBW saw a significant increase in its commercial real estate holdings, which, despite contributing to a spike in profits in 2022, have normalized in the subsequent fiscal year.
For investors and borrowers, the tightened credit conditions and strategic shifts signify a more cautious lending environment ahead. All three banks emphasise a conservative approach to US market engagements, focusing on core operations and strategic asset management to navigate ongoing uncertainties.
So, while Aareal Bank, pbb, and LBBW have shown toughness through proactive risk management and strategic adjustments, the persistent volatility in the US office market continues to pose significant problems. Borrowers should anticipate continued conservative strategies as these banks aim to stabilise and secure their market positions amidst fluctuating economic conditions.
See also commentary by Gifford West, Managing Director of Alpine Tremont.
