(Bloomberg) — For German banks at the forefront of a spreading US commercial property downturn, covered bonds and deposits can offer a lifeline, according to Barclays Plc analysts.
Deutsche Pfandbriefbank AG and Aareal Bank AG have seen their unsecured borrowing costs grind higher as investors scrutinize their loan books for bad US loans. That makes it critical that they continue to be able to rely on more reliable sources of funding.
“It remains critical for the banks to retain access to the deposit and covered bond markets,” Barclays analysts led by Cristina Costa wrote in a note to clients on Thursday. “This is the key variable for the banks to manage in the near term,” they wrote.
US commercial real estate exposures are starting to infect banks the world over, forcing them to mark down the value of their loans as developers struggle under the weight of high debt at elevated interest rates. Deutsche Pfandbriefbank, known as PBB, said Wednesday that it had increased loan-loss provisions, noting “persistent weakness” in real estate. Aareal Bank in November reported that the value of US non-performing loans had risen more than fourfold over the previous year.
PBB says it has no urgent financing needs, and a cushion of more than six months before it needs to refinance in the unsecured market. The German bank has issued six benchmark-size covered bonds since last summer, “largely covering the requirements for 2024,” spokeswoman Grit Beecken said in a written response.
A representative at Aareal Bank, which also runs an IT service business, declined to comment on the analyst report.
Covered bonds are the safest type of bank debt secured by assets, typically mortgages. Because of this, they tend to pay the lowest yields in the bank bond universe and are a steady, reliable source of money
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