EU banking watchdog calls for caution amid “cracks” in CRE

The financial district of Frankfurt am Main, Germany (Credit: Thomas Wolf (Der Wolf im Wald), CC BY-SA 3.0, via Wikimedia Commons)

Banks in the European Union are vulnerable to real estate ‘cracks’, the European Banking Authority (EBA) warned in its latest risk assessment report (RAR). Lenders across the bloc have lent more than 1.4 trillion euros ($1.5 trillion) to the commercial real estate (CRE) sector and also face “elevated geopolitical risks coupled with economic and interest rate uncertainty” the banking watchdog said.

“Structural and cyclical factors have caused cracks in commercial real estate markets,” EBA said in the report, which includes specific chapters dedicated to banks’ CRE exposures and banks’ interconnections with non-bank financial intermediaries (NBFIs), such as investment funds.

EU banks have more than EUR 1.4tn in CRE loans, up 40% over the past decade and while on average this accounts for less than 100% of banks’ capital, yet there are several banks – mainly relatively small in size – which are particularly vulnerable to downturns in this market, EBA said.

“Although banks domiciled in France and Germany reported the largest exposure, exceeding 280 billion euros, followed by banks in the Netherlands that reported 175 billion euros, only German banks reported an elevated share of their total client lending towards CREs,” it added.

NPL volumes in the CRE segment rose by more than 12% in 2023, yet with divergences across countries reflecting the particularly variant dynamics in the sector, the European banking authority said.

“Looking forward, banks plan to gradually increase loan growth. On asset quality, the share of non-performing loans (NPLs) increased for all segments amid slightly positive net NPL inflows in 2023. Banks expect asset quality to stabilise and partially even to improve compared to previously subdued outlooks. Banks also anticipate that household NPLs will grow in 2024 and next years, while corporate NPLs will rise more significantly in 2024 and then level off” the report which surveyed about 80% of the banking sector concluded.

(Source: EBA)