Landesbank Baden-Württemberg
LBBW Stuttgart headquarters
The giant Stuttgart-based property lender LBBW has hired advisers BNP Paribas SA to cut risk from its property lending book, according to a recent report by Bloomberg.
Landesbank Baden-Württemberg (LBBW), the largest of Germany’s powerful Landesbanken, doubled its real estate exposure last year when it took over Berlin Hyp.
LBBW’s CEO Rainer Neske had intimated in an earlier interview that his bank was currently focusing particularly on its real estate exposure since the takeover of Berlin Hyp, a major financier in its own right, with a loan book of about €26bn at the time of the takeover. Since then interest rates have at least tripled, with all the major lenders slashing the underwriting of new business.
The arrangement with BNP Paribas, a synthetic securitisation known as “Project Eagle”, involves LBBW transferring about €5bn of loan risk by the bank paying a premium to funds to insure a part of its loan book against default. Essentially, the funds would take the risk that loans go bad, while the bank gets that lending exposure off its books. The loans remain on LBBW’s balance sheet, but the risk will be left with investment funds.
A spokesperson for LBBW was quoted as saying, “The whole process serves the sole purpose of freeing up capital for future growth. Synthetic securitisations are a common tool to release capital and thus create scope for new lending.”
LBBW doubled its full-year earnings for 2022 to €1.9bn, with an operating profit of €901m, up 10% on the previous year, and its best result since 2006. This includes the integrated results from Berlin Hyp. For 2023 the bank has increased its bad debt provisions against corporate lending to €800m.
Both LBBW and Berlin Hyp both pursue a conservative risk policy with a focus on office buildings and residential real estate. At LBBW, the financing volume at the end of 2021 was around €27 billion, at Berlin Hyp it was around €26 billion. Both banks are also among the largest issuers of sustainable bonds (ESG bonds) among European commercial banks.
Bank lending at lowest level since May 2005
New figures in from Barkow Consulting show that German banks’ property lending fell by 50% in May compared to the same month last year, to a level of €13.7bn. This is the lowest level of bank lending since 2005.
Consultants PwC are also expecting further meltdown in the lending figures, as they anticipate new lending halving yet again over the coming months. A PwC study puts extensions to existing customers at fully 23% of all new lending - the highest share since 2016 - and a sign of just how few newly-bought properties are currently being financed.
Consultants PwC recently said that margins on lending had fallen significantly last year to their lowest level for ten years, and are continuing to fall through 2023. The consultants say they see plenty of indications that margins are still falling. It has become more expensive to refinance on the capital markets, with banks now having to pay higher interest rates on deposits - with construction rates not necessarily rising - against a background of increased competition among the banks to avoid losing market share.
