European Banks’ Property Loan Defaults Risk

By Iain Withers
LONDON (Reuters) – A report by Moody’s Ratings warns European banks may not be adequately provisioned for property loan defaults, potentially increasing problem loans. However, it believes the banks possess strong enough capital buffers to withstand potential issues.

Property owners face challenges from falling prices and rising borrowing costs, elevating the risk of unpaid loans, though recent central bank interest rate cuts have eased some pressures.

Moody’s analyzed the quality of commercial real estate loans at 21 highly-exposed European banks, simulating conditions reflecting stress similar to the 2008 financial crisis. Among these banks, over half were German and predominantly real estate specialists, with others from Sweden, Austria, and Denmark.

The reported loan loss reserve level was set at 40%, the five-year average for large European banks. However, the first quarter of this year revealed a lower average of 33.5%, indicating problem loans have outpaced provisioning growth.

Moody’s report suggested banks might not be sufficiently provisioned, despite a shift toward better quality assets. This sentiment aligns with a recent warning from the European Central Bank, which noted that euro zone banks could be overly optimistic about the valuation of commercial property, potentially obscuring loan deterioration risk.

According to Moody’s findings, banks with significant exposure to U.S. and British offices faced the greatest strain, while those funding housing projects were least affected. Despite the challenges, all surveyed lenders are expected to exceed their minimum capital requirements.

“Our tests, although based on simplifying assumptions, indicate there would be no breaches of minimum regulatory capital levels in the projected scenarios,” stated Moody’s.