German Lender Struggles Amidst Weak Commercial Real Estate Market in the U.S.

by Warren Seah

Shares of a German lender faced a dramatic downturn, plummeting by as much as 14%, following a profit warning caused by the challenging state of the commercial real estate market in the United States.

Deutsche Pfandbriefbank, commonly known as PBB, experienced a sharp decline as the German lender recently announced an increase in its risk provisions due to the “persistent weakness in the commercial real estate market.” Consequently, the bank now forecasts its pretax profits for the year to be between €90 million ($96 million) and €110 million, significantly lower than its initial guidance of €170 million to €200 million. Moreover, PBB has made the decision to cancel its special dividend.

In an informative presentation, Deutsche Pfandbriefbank highlighted that changes in locations and preferences have caused certain tenants to steer away from central business districts. The bank elucidated, “At the time of origination, all U.S. office properties financed by PBB were considered A-locations – however, now approximately 5-10% of these properties are regarded as B-locations.” Despite this change, PBB also asserted that approximately 80% of the market correction has already taken place. Optimistically, the bank stated, “Many ex-prime locations are likely to regain their prime status in the anticipated market recovery.”

Non-Performing Loans and Property Values

The bank has reported a significant drop in property values for both its non-performing and performing loans. On average, the values of non-performing loans have fallen by 41%, while even the performing loans saw a decrease of 24%.

Geographical Breakdown

As of September, the bank’s U.S. portfolio was predominantly concentrated in New York, accounting for 63% of the total. Another 12% was in Chicago, 8% in Washington, and 5% in San Francisco.

ABN Amro’s Challenges

ABN Amro, another struggling bank, witnessed an 8% decline in shares. The Dutch lender cited a weaker-than-expected rise of 20% in net interest income, partly due to a migration of deposits to higher-yielding products. The bank’s net interest income amounted to €1.53 billion, falling short of the consensus estimate of €1.61 billion.

Market Movements

The broader European stock market showed limited activity, with a minor increase in the U.K. FTSE 100 and a slight decline in both the German DAX and French CAC 40. U.S. stock futures indicated mixed performance.

Significant Share Movements

Ahold Delhaize, owner of Stop & Shop, experienced a significant decline of 7% in its shares as it reported weaker-than-expected third-quarter profit.

On the other hand, Marks & Spencer saw its shares rally by 10%. The U.K. retailer resumed paying dividends, albeit at a modest rate of 1 pence per share, following a 75% rise in its adjusted pretax profit for the first half.

ITV, the largest commercial television broadcaster in the U.K., witnessed a 6% decrease in shares. The company announced that its total advertising revenue for the year is projected to fall by 8%, contrary to the 6.5% decline predicted by analysts.

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