German Banks Relatively Well Protected Against a CRE Downturn

The commentary analyses German banks’ Commercial Real Estate (CRE) exposures. Summary highlights from the commentary include:

• Following the onset of the COVID-19 pandemic there were widespread concerns that the commercial real estate (CRE) sector would be adversely affected by the immediate economic impact from the pandemic as well as structural changes such as the an increase in online shopping and the remote working trend. Given the significant exposure German banks have to commercial real estate, a deterioration in the CRE market poses a risk to the health of the German banking sector.

• So far, there has been limited impact in the form of price declines and asset quality deterioration. However, with the recent rise in interest rates and the deteriorating economic outlook in Germany, the commercial real estate market is likely to be adversely affected.

• DBRS Morningstar views the largest impact coming from an increase in risk-weighted assets (RWA) as a result of price declines. We also anticipate a deterioration in asset quality affecting both bank P&L and capital ratios, albeit to a smaller degree, along with weaker loan demand.

“In our view, a potential price decline would have the biggest impact through the banks’ credit models leading to an increase in RWAs, thereby weakening capital ratios. We note that banks are better capitalised than during the global financial crisis and are not expected to breach regulatory capital limits as a result.” said Sonja Förster, Vice President from the DBRS Morningstar Global Financial Institutions team.