Banks face further loan losses from global office market slump

By Iain Withers

LONDON (Reuters) – Banks globally will likely rack up further losses on office property loans as a bruising crash in valuations leads to more defaults, credit rating agency Morningstar DBRS said on Wednesday.

Higher borrowing costs and a sharp fall in demand for office space as more people work from home has punished commercial landlords, increasing the risk of their bank loans going unpaid.

Several lenders including Wells Fargo (NYSE:) and JPMorgan (NYSE:) in the United States and Deutsche Bank (ETR:) in Germany have set aside more cash to cover potential losses on office loans, particularly to cover exposure in the United States.

Markets are increasingly concerned about banks’ real estate exposures, with jitters this month focusing on smaller lenders New York Community Bank and Deutsche Pfandbriefbank, leading to sharp falls in their respective share prices.

Morningstar DBRS researchers said they expected further provisioning.

“In our view, many banks will need to make some downward revisions to property valuations and, as a result, incur higher provisions and loan losses,” said Nicola De Caro, Senior Vice President of Global Financial Institutions at Morningstar DBRS.

“Given the renewed market pressure after the banking turmoil of last spring, we will continue to monitor closely any potential implications on depositor confidence and liquidity at banks.”

Deteriorating sentiment will likely contribute to higher financing costs, including outside the United States, Moringstar DBRS said in a note, with risks exacerbated by a tightening of bank lending standards.

While the impact of lower office prices remained largely contained for most lenders, banks might need to make further adjustments in the absence of a “true recovery” for the sector, the note added.