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    Forward Guidance

    Real Estate Crisis Hits Two German Banks | Josef Pschorn on Deutsche Pfandbriefbank and Aareal Bank

    Fri Feb 23 2024
    Commercial Real Estate BankingGerman BanksNet Interest MarginsBank FailuresMortgage REITs

    Description

    The episode discusses concerns about commercial real estate banking markets in Germany, with a focus on two German banks experiencing extreme weakness. It explores the risks associated with high exposure to underperforming sectors like commercial real estate and the challenges in sustaining positive net interest margins. The episode also delves into the management of deposits and liquidity in Deutsche Fungri Bank, insights on bank failures and mortgage REITs, and a comparison of real estate loans between Japumpi Funk and another bank.

    Insights

    Bitcoin as a Hedge Against Government Devaluation

    Bitcoin is seen as a macro asset that can hedge against government devaluation of money.

    Importance of Fandbriefs in European Banking

    Deutsche Fandbrief Bank relies heavily on Fandbriefs (Covered Bonds) for financing, which have a long history of safety and importance in European banking.

    Resolution Mechanisms for Smaller US Banks

    Initiative to introduce resolution mechanisms for smaller US banks is being considered, aiming to decrease the time between issue and bank resolution.

    Managing Deposits and Liquidity in Deutsche Fungri Bank

    Deutsche Fungri Bank has been successful in managing deposits and ensuring liquidity, but faces challenges due to a lack of loyalty among customers and potential deposit withdrawals overnight.

    Challenges with NPLs and Distressed Assets

    Challenges with non-performing loans (NPLs) and distressed assets require a supportive market environment for better transactions.

    Chapters

    1. Concerns about Commercial Real Estate Banking Markets in Germany
    2. German Banks Heavily Exposed to Commercial Real Estate
    3. Insights on Fonbreath Bank and Deutsche Fandbrief Bank
    4. Challenges in Sustaining Positive Net Interest Margins
    5. Initiative to Introduce Resolution Mechanisms for Smaller US Banks
    6. Managing Deposits and Liquidity in Deutsche Fungri Bank
    7. Insights on Bank Failures and Mortgage REITs
    8. Comparison of Japumpi Funk and Another Bank's Real Estate Loans
    Summary
    Transcript

    Concerns about Commercial Real Estate Banking Markets in Germany

    00:00 - 07:39

    • Yosef Schorn, a relative value credit manager, discusses concerns about commercial real estate banking markets in Germany.
    • Yosef's firm focuses on relative value credit by combining different financial instruments to create positive convexity.
    • Two German banks, PBB and ARL Bank, are experiencing extreme weakness due to their concentration in commercial real estate loans.
    • The risk profile of these banks is heightened as indicated by the distress levels of their capital structure components like AT1s and non-preferred senior bonds.
    • Market participants are concerned about the high risk associated with these banks despite their stock prices not reflecting the true extent of potential default.

    German Banks Heavily Exposed to Commercial Real Estate

    07:16 - 14:49

    • Pawnbrief and Fun3Funks are German banks heavily exposed to commercial real estate, particularly office buildings in the US.
    • Arielle Bank is perceived as a strong lender but faces risks due to its high exposure to underperforming sectors like commercial real estate.
    • The commercial real estate situation in Germany is concerning, with many developers defaulting and complex structures making it difficult to unravel.
    • Increasing interest rates have led to significant losses for investors in commercial properties, requiring additional equity investments to maintain stable loan-to-valuation ratios.

    Insights on Fonbreath Bank and Deutsche Fandbrief Bank

    14:26 - 21:48

    • Losses on property can deter equity investors from putting in more money, impacting investments.
    • Bitcoin is seen as a macro asset that can hedge against government devaluation of money.
    • Fonbreath Bank's credit quality and provisions are under scrutiny by investors like Peter's advisors.
    • The bank has attracted retail investors with term deposits, providing stability in funding for the next six months.
    • Deutsche Fandbrief Bank relies heavily on Fandbriefs (Covered Bonds) for financing, which have a long history of safety and importance in European banking.

    Challenges in Sustaining Positive Net Interest Margins

    21:19 - 29:09

    • Changes in funding situations for banks have led to challenges in sustaining positive net interest margins.
    • Differences in pricing and conversion features between AT1 and Tier 2 securities impact investor decisions.
    • Mispricing between AT1s and Tier 2s can present trading opportunities based on potential recovery scenarios.
    • Resolution strategies for failing banks involve bailing in different parts of the capital structure to avoid costly taxpayer interventions.

    Initiative to Introduce Resolution Mechanisms for Smaller US Banks

    28:51 - 36:17

    • Initiative to introduce resolution mechanisms for smaller US banks is being considered.
    • Market assigns high probability to Deutsche Fund getting resolved or paid market prices.
    • Bail-in of banks could signal issues in the commercial real estate market.
    • Introduction of resolution mechanisms has decreased time between issue and bank resolution.
    • Banking landscape shifting towards viewing banks as utilities with significant negative repercussions if they fail.

    Managing Deposits and Liquidity in Deutsche Fungri Bank

    35:54 - 43:21

    • Deutsche Fungri Bank has been successful in managing deposits and ensuring liquidity.
    • American banks faced more severe problems compared to European banks due to regulatory changes.
    • There is a lack of loyalty among customers towards banks, leading to potential deposit withdrawals overnight.
    • The relationship between loans and deposits in banks can impact the risk of bank runs.
    • Deposit insurance schemes in Germany cover up to 100,000 euros at the federal level with additional support mechanisms from private and savings banks.
    • Resolution of failing banks like Deutsche Fampri could involve bail-ins or support from deposit schemes, raising questions about who will bear the costs.

    Insights on Bank Failures and Mortgage REITs

    43:02 - 50:37

    • The podcast discusses the scenario of a bank failing and being bailed out by regulators, emphasizing the nature of the business.
    • Positive market backdrop in credit with oversubscribed new issuers and lower rates could benefit funding and valuation for buildings.
    • Challenges with NPLs and distressed assets require a supportive market environment for better transactions.
    • Discussion on mortgage REITs owning loans similar to banks but collateralized differently, impacting recovery for junior investors in insolvency.
    • Longer duration liabilities of some banks may be a silver lining as regulators may step in quicker to resolve issues if liabilities exceed assets.

    Comparison of Japumpi Funk and Another Bank's Real Estate Loans

    50:10 - 52:21

    • Comparison of Japumpi Funk and another bank's real estate loans and balance sheet assets
    • Assessment of a private bank's prospects, noting its diversification and exposure to the US market
    • Private bank's specialization in hotel lending and benefit from increased rates on loans
    • Impact on private bank's net income due to stable deposits
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