June 24, 2013 / 2:52 PM / 4 years ago

Fitch: Specialised German Commercial Real Estate Banks

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Specialised German Commercial Real Estate Banks - Benign Real Estate Market Fundamentals Eclipsed by Regulatory Challenges here LONDON/FRANKFURT, June 24 (Fitch) Fitch Ratings believes that specialised German commercial real estate (CRE) banks will continue to benefit from benign real estate market fundamentals in the prime German and European CRE investment markets. However, some European CRE markets, particularly Spain and Italy, are depressed to which German CRE lenders have exposure to. This could be a source of increasing loan impairment charges (LICs). Regulatory challenges exist through German CRE lenders being wholesale funding reliant. "Their lack of stable deposits will make it difficult for some banks, especially independent ones, to meet the net stable funding ratio requirements under Basel III, although the rules are still in flux," says Markus Schmitt, Associate Director in Fitch's Financial Institutions group. In light of this strategic challenge, some banks have started to collect internet retail deposits. The benign real estate investment climate is driven by multiple factors, including a low interest rate environment, low domestic unemployment, increasing private consumption, attractive yields, and inflation fears, which cannot yet be seen, resulting in value-preserving property investments. In addition, low, albeit increasing, construction activity, net migration to metropolitan areas and an increasing number of households are fuelling demand for living space, while foreign investors are showing substantial interest in buying German property. This is all driving investment activity and property prices. German CRE lenders have been able to realise increasing gross margins in new business due to less competition and a repricing of credit risk in the past few years, although further increases will be difficult to achieve as new and old players are attracted by margins which reflect a multiple of pre-2008 lending conditions. However, we believe Germany's specialised CRE lenders should be able to achieve 2013 profits in line with 2012 profits in a base case scenario, particularly driven by low expected domestic LICs. Fitch says that current underwriting standards are sound as loan to value ratios (LTVs) for new business have decreased and have ranged between 55% and 65% in recent quarters, resulting in attractive returns on risk adjusted capital. In addition, refinancing pressure from high CRE loans outstanding or accelerated liquidation/restructuring of assets from the resolution of German open-ended funds or German CMBS is currently no material threat for domestic property prices. Germany's CRE lenders' IDRs are support-driven, resulting in IDRs that can be multiple notches above their respective Viability Ratings (VRs). Fitch's view on support is sensitive to developments in the regulatory and legal framework, particularly emanating from the European Commission with regard to bail-ins, centralised regulatory oversight and adjustments to deposit insurance schemes, and the changing attitude of the German authorities to using their resolution tools. Current VRs provide a broad indicator of where rated Pfandbrief issuers' IDRs could end up if Fitch changed its view on support (see "Support is Key to German Pfandbrief Issuers' Ratings", published 28 August 2012 at www.fitchratings.com). For more information, see "Specialised German Commercial Real Estate Banks - Benign Real Estate Market Fundamentals Eclipsed by Regulatory Challenges", dated 24 June 2012 at www.fitchratings.com or by clicking the link above . Contact: Markus Schmitt Associate Director +49 69 76 80 76 129 Fitch Deutschland GmbH Taunusanlage 17 D-60325 Frankfurt am Main Michael Dawson-Kropf Senior Director +49 69 76 80 76 113 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com; Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available at www.fitchratings.com. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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